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Knowing how to control your emotions while trading can prove to be the difference between success and failure. Your mental state has a major impact on the decisions you make, especially if you are new to trading, it is important to maintain a calm demeanor to keep trading. In this article, we examine the importance of day-trading psychology for both novice and seasoned traders, and provide some guidance on how to trade without emotion.
The Importance of Controlling Emotions While Trading
The importance of emotional control in day trading cannot be overemphasized.
Imagine that you have just made a pre-NFP trade and expect that if the reported number is higher than forecast, the EUR/USD rate will rise rapidly, allowing you to trade for a strong short. term profit.
NFP is coming, and as you’d hope, the numbers exceeded expectations. But for some reason the price dropped!
You think back on all the analysis you did, all the reasons why EURUSD should go up – the more you think about it, the more the price goes down.
When you see red piling up in your losing position, emotions start to take over — it’s the “fight or flight” instinct. This urge often prevents us from achieving our goals, and for traders, this can be very problematic. lead to a subconscious reaction.
Professional traders don’t want to risk making rash decisions that damage their accounts – they want to make sure a knee-jerk reaction doesn’t ruin their entire career. Learning how to minimize emotional trading can take a lot of practice and multiple trades.
The 3 Most Common Emotions Traders Experience
Some of the most common emotions traders have are fear, nervousness, belief, excitement, greed, and overconfidence.
anxiety/nervousness
A common cause of fear is overtrading. Improperly sizing trades can unnecessarily increase volatility and cause you to make mistakes you wouldn’t normally make if you weren’t risking bigger losses than usual.
Another reason for fear (or nervousness) is that you are in the “wrong” trade, which means it doesn’t fit your trading plan.
Faith/Passion
Faith and excitement are key emotions you want to cultivate, and you should feel them in every trade. Faith is the final part of any good trade, and if you don’t have some level of excitement or belief, there’s a good chance you’re not in the “right” trade.
“Correct” means to trade correctly according to your trading plan. Good deals can be losers, just as bad deals can be winners. The idea is that you only win and lose on good trades. Make sure you have confidence in the trade to ensure this.
Greed/Overconfidence
If you find that you only want to make trades that you think might be big winners, you can become greedy. Your greed can be the result of good performance, but if you’re not careful, you can slip and end up in the red.
Always check that you are using the correct trading mechanics (ie stick to stops, targets, good risk/management, good trade setups). Sloppy trading due to overconfidence could end a strong run.
Learn more about how to deal with greed and fear when trading.
DailyFX Analyst Nick Cawley on Losing Discipline
Nick Cawley has over 20 years of market experience and trades a variety of fixed income products.
“My worst deals – some of them – were when I lost discipline and my best plans were disrupted.
“I didn’t use the correct setups and stops. I thought I was ‘better’ than the market; as I lost more and more, I doubled my bets and put more money in my trading account to keep track of my loss.
“I lost control of my emotions and when I was supposed to be looking at my position with no emotion, I took action, then cut it off and moved on. Easier said than done, but for anyone looking for a long-term A must for successful traders.”
How to Control Emotions While Trading: Top Tips and Strategies
Planning your approach is key if you want to keep negative emotions out of your trading. The old adage “if you don’t plan, you plan to fail” really applies to financial markets.
As a trader, there is more than one way to make money. There are many strategies and methods that can help traders achieve their goals. But anything that works for that person is usually a clear and systematic approach. rather than based on “hunches”.
Here are five ways to give you more control over your emotions while trading.
1. make personal rules
Setting your own rules when trading can help you control your emotions. Your rules may include risk/reward tolerance levels for entering and exiting trades with profit targets and/or stop loss settings.
2. Trade the Right Market Conditions
It is also wise to stay away from less-than-ideal market conditions. It’s a good idea not to trade unless you “feel” it. Don’t look at the market just to make yourself feel better; if you’re not a good fit for trading, the simple solution might be to retire.
3. Lower Your Trade Size
One of the easiest ways to reduce the emotional impact of a trade is to reduce the size of the trade.
Here is an example. Imagine a trader opens an account with $10,000. Our traders first trade on EUR/USD at $10,000.
With trades hovering around $1 per pip, traders are seeing moderate volatility in accounts. With $320 offered as margin, our trader saw his free margin fluctuate from $9,680 to $1 per pip.
Now suppose the same trader made a trade of $300,000 in the same currency pair.
Now our trader has to put in a $9,600 margin – leaving only $400 free margin – and is now trading at $30 per pip.
After the trader moves only 14 pips against us, the free margin is exhausted and the trade is automatically closed as a margin call.
The trader is forced to lose money; you don’t even have a chance to get the price back up and pull the trade into profitable territory.
In this case, new traders are simply putting themselves in a position where the odds of success are simply not in their favor. Reducing leverage can greatly reduce the risk of such events in the future.
4. Create a trading plan and trading journal
In terms of fundamentals, planning for various outcomes ahead of major news events is also a strategy to consider.
Results between new traders who use a trading plan and those who do not can be important. Creating a trading plan is the first step in combating trading sentiment, but unfortunately, a trading plan does not completely prevent the effects of these sentiments. It is also helpful to keep a Forex trading journal.
5. Relax!
When you relax and enjoy trading, you are better able to react rationally in all market conditions.
Further Resources to Manage Emotions and Support Your Trading
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