Trading Psychology: Managing Emotions

At the start of today’s lesson, we first examine the old cliché – “don’t act on your emotions”. Is this even possible for beginners? We’re not robots, so we shouldn’t try to act like a robot and suppress what’s going on in our minds.

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Traits of a successful trader

Discretionary traders do not program trading standards and remove “ego” from the decision-making process like quantitative traders.

But even if you don’t take quantitative actions, you still need well-established rules to guide the decision-making process and manage risk. a trading plan. This is the first step in moderating negative emotions (such as fear) and emphasizing positive emotions (such as beliefs).

But no matter how well prepared you are, you still need to face the thoughts and feelings that affect your trading. Everything starts with self-awareness. Building good self-esteem means you have a good understanding of yourself and your strengths and weaknesses.

For example, let’s start with fear, a very common weakness in trading. What’s causing it, but what exactly? A common culprit is excessive behavior. If you trade at an inappropriate trade size, you will unnecessarily increase volatility and cause you to make irrational mistakes that you would not normally make if you traded within reasonable risk limits. Simple solution? Reduce your deal size to a manageable level.

There may be a bigger problem making you anxious. Maybe you’re underperforming and experiencing losses. While retracements are a natural part of trading, if left unchecked, they can become severe enough to cause not only monetary damage but psychological damage as well.

When you get to this point, the first piece of advice is to admit that you are struggling and take a break from the market. Leave the fire. Downtime is almost certainly designed to make you feel better right away. Once you’re able to unzip it, it’s time to get to the source of the problem.

From there, solve the problem at hand one by one. Otherwise, you’ll be overwhelmed trying to fix everything at once. Once you are confident that you have made the necessary corrections, start trading again with a negligible trade size. Your goal at this point is to restore your confidence by making quality trades rather than trying to quickly cover all your losses to get back on track.

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Build trading confidence

Faith, excitement are key emotions we want to cultivate. You should feel good when you pull the trigger. This is the last piece of any good deal before it is executed – a conviction. If you don’t have a belief that pushes you to keep going and pull the trigger, you’re probably not in the “right” trade. “Correct” means the correct trade based on your analysis.

To be clear, good deals can and will be losers, just as bad deals can be winners. The idea is that you only win and lose on good trades. Stopping to make sure you really believe in a trading idea will help ensure that.

If you lack conviction or enthusiasm, but still have a great lineup, it may be market related (i.e. too volatile) or personal (you may be afraid of recent losses). It is wise to stay away from market conditions that do not suit your strategy.

To summarize: It all starts with SELF-AWARENESS. Listening to your emotions and understanding them and how they can impact your ability to make good decisions. By listening to yourself you can match the objective (cause) with the subjective (emotion) to help ensure you are trading in the right frame of mind.