How To Control Your Emotions When Trading

February 20, 2014 5:36 pm

psychologyAs far as trading goes, you are your worst enemy. If you fail, in most cases you fail because you made the wrong choices. It’s not the market that is treating you badly, and you can’t really blame it on imaginary concepts like luck (plus, let’s face it – you will never be a successful trader if you think that the way to your goal goes through “luck”). In the introduction we said that psychology was very important in trading.

We also showed you your first enemy – fear, and told you that the only way to defeat it was to not let it affect you, and to make rational choices instead of hasty moves while under the effects of your emotions. Here we will expand on that point and we will give you a few more in the hopes that by the end you will know how important trading psychology really is.

You are your own worst enemy. We say that and it sounds as banal as it seems nebulous. But it’s also so true. There are three very important aspects of successful trading (mastering all three of these aspects is what is required of every good trader) – psychology, strategy and money management. But here’s the thing – you may have a flawless strategy because you’re an analytical person in general and you’ve poured hundreds of hours of amassing additional knowledge about technical analysis and studying the market.

Your strategy is good and when you follow it, you tend to have more successful than unsuccessful trades. As for your money management – it’s great. Most traders would dream to be you. As you’re reading this, at this point you probably think that this enough to be a good trader. But you’re wrong.

Because the most important aspect is the psychological one – no matter how good a strategy you have, or how strict your money management is, if you don’t follow it, it doesn’t matter. You might think that there is no reason not to follow it if it’s so good, but the only reason you are thinking this right now is because you’re not under the effect of your emotions. If you were, you would probably see things differently.

It’s quite possible to make trades “because they seem good” or because “your gut tells you to”. This is where psychology comes into play. This is what separates the good traders from the average ones. A good trader doesn’t stand in his own way. He is not bound by emotions. He doesn’t take unnecessary risks because “he feels like it”. Mastering your emotions and being independent of them is crucial for your success. How to do it? Simple – follow your own rules. If you’re good enough at the technical aspect of trading, then all you have to do is to be disciplined and to follow what you know is going to make you some money.

Knowing when to quit and push are a big part of this. Sometimes you might feel like pushing, and sometimes you might feel like pulling, but you should never do anything just because “you feel like it”. Follow your strategies and your rules. You can’t go wrong with that. A great example would be the attempt to recoup your losses right away.

If you lose money on the market, the natural urge to get it back will arise. Ignore it. This urge will tempt you to make bad decisions. It may cause you to think that a trade is good when it’s actually bad, which is when you will end up losing even more. In a sense, this feeling is the opposite of fear, but it can also be much more dangerous. However, if you’re disciplined and you follow your rules, you will be fine.

Greed is another huge factor that can cause epic failures. Traders tend to make terrible decisions when they get greedy. Thinking that you will make a lot of money in a “sure thing” can be one of the biggest mistakes of your trading career. Greed can get you into a lot of trouble. Every time you feel like you’re getting greedy, you should take a step back and maybe take a break before you make a colossal mistake.

Other things you should opt to control are emotional swings (having your emotions directly tied to the results of your trades). If you’re having emotional swings, this means that you are too emotionally invested in your trades. Luckily, if you manage to follow what we talked about above, your emotional swings should disappear by themselves.

Finally, if you follow our little guidelines, you will also be able to defeat nervousness. Being nervous all the time is not only unpleasant, but it’s also unhealthy. If you manage to separate your emotions from your trading, the nervousness should also disappear.

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