Keeping emotions out your trading is critical to being able to execute a trading strategy consistently. This is one of the hardest things to get to grips with when you first start trading. These emotions manifest themselves in many ways. Those most common are boredom, greed, fear & hope.
PLEASE UNDERSTAND THESE THOROUGHLY AND ACKNOWLEDGE IF THESE BEGIN TO AFFECT YOUR TRADING.
Boredom
The markets aren’t always as active and fast-paced as the films about Wall Street would have you think. Yes, there are periods of high adrenaline and excitement, but most of the time the markets are relatively sleepy. Some traders are happy to sit and stare at the charts all day trading on shorter time frames, whereas I personally prefer trading daily candles because otherwise, I become incredibly bored. The danger here is that when you are bored you will look for trading opportunities when they simply do not exist. If you don’t have enough discipline you will end up taking poor trades, which is more akin to gambling than it is to trading.
Greed is something we’ve mentioned several times before and it manifests itself in several ways. In one sense, greed is useful: greed is what drives many of us to consider trading in the first place. Greed is what keeps us going. Whatever your motive, whether it’s financial freedom, a new car or extra income, they are all fundamentally driven by a desire to have what you don’t currently have.
However, remove all greed from your trading. Greed has no place in actual trading. Greedy traders take profits too early, trade too big and become stubborn when it comes to closing a position. You need a good money management plan (Seethemoney management guide) and an exit strategy you consistently adhere to. This will enable you to remove the temptation to be greedy.
Fear manifests itself in many ways whilst trading and all traders have experienced this in some way or another. Those who have not conquered their emotions seriously compromise their chances of long term success. The different ear-driven pitfalls are outlined below.
Fear in a position: This is the fear that a trader experiences when he/she enters a trade and is emotionally attached to the outcome. The trader will likely be watching the market whilst every small change in price occurs, and if the trade goes against them the traderwill become scared. This fear typically leads to loss aversion, because the fear of losing the position is so great it causes the trader to extend their stop loss and hope the trade turns back to profit. The solution to this is simple: if you are scared in a trade, you are trading with a position size which is too large, and you should close it immediately. Accept that you will have losses, and if you are managing risk correctly these should not be scary.
Fear of missing out: This links in closely with boredom. Many people feel that if they are not trading, they are missing out on money. As such, they begin looking for setups where there are none and end up making bad trades. This can also occur if you see a market in a significant move and get caught up in the hype. You may see or hear of other traders that have made a lot of money on a position, and feel like you have missed out. This is particularly common on brokers with social network aspects. These brokers make it easy for traders to show off their trades.
As a newbie trader, you would then get into the market just as the move is over and lose all your money. You are then frustrated that the market went against you and try and make the money back. You are now trading off a combination of fear, hope and anger. This is a recipe for disaster! Fortunately, if this sounds all too familiar, the solution to this simple. By using a rule-based strategy with a fixed portfolio of markets you trade, which we will provide you, you will not miss moves in your markets and will not be lured in by other unfamiliar markets.
Fear of failure: Losing periods can be difficult, but it is important that you don’t bring your ego into trading. During a losing period (See Drawdown Guide), many traders let the fear of losing another trade prevent them from taking a set-up, or they begin picking and choosing the set-ups. This increases the likelihood that they will miss a big trade which results in destroying the profitability of a trading systems real potential. It is important to remember that a trading strategy’s success is determined by all the trade you make (or don’t) and you need to be using the system consistently and accurately for it to work properly. Counterintuitively, often trades you suspect aren’t going to win can end up being your biggest profits. Therefore, you need to take every set-up your trading system tells you to make.
Provided you can consistently use good money management with a profitable strategy (such as the ones in later guides), there is nothing holding you back from being a profitable trader. Conquer your emotions, and you will conquer the markets.
Hope often comes hand in hand with greed and fear. Traders in a losing position show signs of hope that the market will turn around, leading to loss aversion. Traders in a losing position also overtrade, by both increasing position size and placing trades outside the system limitations,in the ‘hope’ they will win the next position and make up their losses. Hope is for gamblers; don’t trade on hope. On the flip side, winning traders hope the market will keep going even after they receive an exit signal (See Exit strategy guide). This results in them giving up more of their profits than they planned.
If you ever find yourself trading under any of these emotions, stop. Ask yourself if the set-up is within your trading rules, ask if your money management sufficient, and ask yourself why you are doing what you are doing. If you are still trading emotionally, it’s time to take a step back and go back to the drawing board.