Two weeks ago we looked at how to identify and understand your emotions, the good and bad emotions and how to manage and control them. For this week’s newsletter article, we will look at the six most common emotions experienced by traders and how to deal with them effectively.
This is one of the most talked about emotion amongst traders, it manifests itself in many ways, and leads to behavioural biases that eventually lead to mistakes while trading. When a trade turns against you, the fear of losing your hard-earned money is all too common – it delays the realisation of a loss which leads to even bigger losses and when it comes to profitable trades, it makes traders close winning trades too early because of the fear of a loss.
Greed has a positive and a negative impact on trading. The positive side is that it stimulates traders to move further, try different strategies and spot trading opportunities, but it can also cause impulsive trading decisions that should be avoided. If you are driven by greed, you will most likely forget about safe trading and risk management in pursuit of profits. It strengthens the gambling mindset, which lets impulsive decisions overwhelm rational thinking.
How could hope be negative? It usually goes hand in hand with fear and greed. When you are in a losing trade there is always hope that the market might turn so you can go from a loss into profits.
By delaying your realisation of a loss, you risk losing more money.
If you are feeling uncomfortable with your trade, it might be a sign that something went wrong. Feeling overanxious could mean that your position size is too big or you have over analysed your trade. Keep track of your inner feeling of excitement or anxiety, ask yourself what brought these emotions on. It might help you exit a trade that you shouldn’t have taken.
This is more a state of mind rather than an emotion. If you lose focus, you might be bored and treat trading as a routine. If your focus is elsewhere, you might miss good trades. Remember your “why” and stay focused.
This is quite a common reason for trading mistakes. When you are in a situation when you miss trades, break your own rules or risk too much money, it can swallow you up. It reinforces bad habits and intensifies problems.
Now that we have looked at the most common emotions experienced by traders, here are ways to deal with your emotions:
- Have a set of rules
This can help identify and control any emotions that may come up while trading. Your rules can include risk/reward ratio, risk management strategy and the use of stop loss and take profit orders.
- Analyse market conditions
Volatile markets can bring good trades but also there is high risk as well. If you know the market is too volatile to trade, don’t trade it but rather wait.
- Smaller position size
The risk of losing money or blowing an account is going to bring emotions up, having a smaller position size can also bring those emotions down. It will reduce stress from fear of losing money.
- Trading Journal
This must be the most spoken about skill in my articles because it works so well.
Trading is tricky but it can bring you profit. If you stay calm, you will be better prepared to face problems, think rationally, and make thoughtful trading decisions.
We are human, we still have emotions and as much as we would like to be able to turn them off, its not that easy, so its better to be prepared for when they do show up rather than not know what to do. These skills will help you to ensure that if they do show up you will be well prepared to tackle them.
- Ryan Mowatt, The Performance Coach