Welcome back, Traders!
As you may remember, a couple of weeks ago we have briefly discussed the Mindset of a Successful Trader. Today we are going to dig deeper into how controlling your emotions can help you become a better, more consistent and profitable trader in the long run!
What are Emotions?
Psychology is a fundamental part of Trading, as such it is very important to understand how emotions - defined as strong feelings such as happiness, love, fear, anger, or hatred (and many more) can influence your trading - from analysis, through execution to profitability.
In the 21st Century, trading became an amazing opportunity for individuals to invest with small capital to generate a second income stream, diversify an investment portfolio or beat the low-interest rates offered by banks! However, it can also be an extremely challenging path as it requires each one of us to learn & master some fundamental skills like risk management, discipline or focus. Not to mention finding out strategies that suit our trading style and personality…
We certainly hope that you haven’t given up on reading (or trading!) yet! We do believe that there are so many benefits to trading that can help people reach their goals and become better versions of themselves! Most of the skills that traders learn are easily transferable to other areas of life too!
Why are emotions important?
For any retail trader, trading means investing with own capital, which can and often does lead to being emotionally attached to every trade executed. As Traders, we accept risks involved in anticipation of a reward that can come from speculation on the currency market. However, there is no perfect way or strategy and we will all experience losses at one point or another. Our emotional response to both wins and losses is what ultimately will make or break a trader.
What’s the fuss about?
To put it simply, our feelings and emotions can impact the decision-making process - instead of objectively analysing the charts or anticipating the impact of certain news events we may let our personal opinions & beliefs affect our strategy, which (most often) will lead to bigger losses or accounts being wiped out.
In case you’ve missed our Mindset of a Successful Tradelesson, let’s quickly re-cap the top 3 emotions that can lead to irrational decisions:
Fear is an unpleasant emotion or thought that you have when you are frightened or worried about your current circumstances or the outcome of your actions. In trading, it is most commonly associated with the fear of loss, fear of missing a trade and fear of losing a profit.
Greed is a very strong desire to (continuously) get more of something. In trading, it is always about money. Traders influenced by greed are more likely to act impulsively, execute trades with poor risk to reward ratios, not adhere to their risk management or trading strategies.
Hope is an expectation that something is going to happen. Most traders experience hope when they are in a losing trade that is about to hit their Stop Loss (SL). They hope that the market will turn around and move in their preferred direction if they only increase their SL level. Leading to even bigger losses sustained by the traders. You have to accept the fact that losses are part of the game.
How to avoid being emotionally invested?
Unfortunately, there is no shortcut - learning how to control your emotions is a process that takes time and most importantly a lot of practice.
We all have to start with some fundamental assessments - what type of trader am I? What is my risk appetite? How much can I invest? What are my short/medium/long-term goals? Where can I find some help?
Once established, we should focus on researching strategies that best suit us. Signal providers are where most new retail traders start - and the market is, unfortunately, saturated with hundreds of untested providers or self-proclaimed ‘gurus’ with shiny watches and rented supercars. The good news is that there are many tried and proven signal providers out there and we even have a few listed on our new platform - The Traders Shop! Just always remember to use a demo account first, find out the recommended risk management and seek out help if needed!
When we are confident with the strategies we want to use, we should focus on the right environment around us. Trading live capital is stressful enough so make sure you’re not distracted by other factors when trading and if you find yourself forcing trades just take a step back! Take a day or two off trading, reset your mind and get back fresh once you’ve regained your focus!
Remember, there may be days where you will not see a valid set-up, there may be days or weeks when you will be at loss or barely breaking even but there also may be days when you hit your weekly or monthly targets within a few hours…It is important to have realistic targets and goals written down in your trading plan!
If you’re experiencing a losing streak make sure you stick to your risk management so you can always come back again the next day! Similarly, if you’ve hit your daily target don’t force any more trades! Sit back, relax and enjoy a job well done as there is always tomorrow!
We hope you’ve enjoyed this lesson and will be back next week as we continue with our Free Education!