Mastering Emotions in The Financial Markets
Subscribe
Emotion-led trading decisions is THE MOST prevalent factor causing traders to go bust in the cutthroat world of trading. Many mistakes are made when traders become impulsive and make decisions driven by emotion.
While we’re all human, professional traders are most learned when it comes to the art of keeping their psyche in check.
Emotion-led trade decisions are never based on logic and WILL lead to losses. Profitable traders derive their decisions from well-developed strategies designed to keep trading as objective as possible.
In this week’s installation, we look at the common emotions that traders face and how a robust strategy could help us steer clear from the mistake of emotional trading.
Mastering Emotions
If you don’t master your emotions, your emotions masters you.
The Most Common Trading Emotions:
- Fear
- Greed
- Hope
- Boredom
- Frustration
The trading business is a realm of uncertainty, but I’m 100% certain that, novice or veteran, you have experienced the above emotions at some point in your trading journey.
Fear
Fear wreaks havoc on a trader’s psyche and equity. The strongest emotion of the 5, fear begins as soon as a trader loses money on a live account.
There are 4 major causes of fear.
- Fear of losing
- Fear of missing out (FOMO)
- Fear of profitable trade turning bad
- Fear of being wrong
Fear of losing
With traders often quoting equity to quantify their trading success, fear of losing is the most common cause of fear. Novice traders fear loss due to the lack of proper education and access to a sound strategy.
As losses pile, their psyche suffers and fear creeps in. Fear that they couldn’t find a way to be consistently profitable, fear that not only would they not find success, but that they may end up paying for it.
The fear of losing causes hesitation during trade executions and exits, making the trader miss good trading opportunities or a good entry price.
Even professionals lose sometimes, the difference is that they understand and trust their strategy’s statistical performance, deriving their confidence to execute that winning strategy without fear. I did an in-depth discussion about this in my previous article.
In the midst of a chaotic market environment where the only constant is change, it is key to find your constant (strategy) and stick with it throughout.
Naked trading and drawing trendlines are good, but the approach could be too subjective at times. A consistent, robust system, uses more indicators than drawings to eliminate human error. Here are some free ECS indicators you can check out to configure your system.
Fear of missing out
Anyone heard of FOMO? The Bitcoin mania in 2017 is a scholastic example. Everyone, even non-traders, wanted to jump on the bull bandwagon. They feared missing out on profits so much that they threw caution to the wind.
While people who got in early made money, those who bought Bitcoin due to FOMO came on too late and got obliterated when prices crashed out.
Trading requires sound planning and strategy to be profitable. Markets will always punish irrational FOMO trade calls.
“An investment in knowledge pays the best interest”
– Benjamin Franklin
Likewise an investment in trading education could do you a great favor in your trading career.
Fear of good trade turning bad
Fear of a good trade turning bad is felt by traders who experienced more losses than winners historically. They want to “lock profits in” as soon as possible.
These traders often exit prematurely just to see the price go in their favour afterwards. Traders without a strategy tend to have this hindsight mentality.
Know how to let profits run and minimize risk.
A system that has in-built means and levels of stop loss and take profit helps to eliminate psychological conundrums.
Fear of being wrong
The fear of being wrong has to do with a trader’s ego desiring to be right, rather than focusing on the business of money-making. If you have a strategy that has a proven track record of being consistently profitable, then you wouldn’t have the fear that a trade may not work out.
Afflicted traders will make mistakes like banking profits prematurely or widening stop losses hoping the trade would eventually go in their favour.
Fact is, there will always be losses in trading. It’s part of the business. If you fear a trade going awry even when it fulfils system parameters, you are setting yourself for failure.
“I don’t care about your theory-crafting. The purpose of trading is to make money. Can you make money?”
– Nenad Kerkez aka TarantulaFX
Don’t trade the pair. Trade the strategy. Have a SYSTEMatic approach.
Greed
Greed creeps in when traders are on a prolonged winning streak. The feeling of invincibility gives the trader a false sense that trading is easy.
Over-risking and breaking rules are greedy mistakes. This is a gambler’s behavior and in gambling, the edge belongs to the casino. By being greedy, a trader relinquishes control to the chaotic markets.
Out-of-system (OOS) trades, impulsive entries, and volatile risk management quickly can and will crash out your account.
Hope
Traders caught in a losing position but refuse to admit their impending loss resort to hope. They widen stop losses and try to compensate past losses. There is no place for hope in trading.
In trading, hope is a nicer term to describe a person living in denial.
Boredom
Trading profitably requires patience, planning and experience.
Being trigger happy due to impatience is trading without a plan. This will lead to losses. Even if one manages to profit trading out of boredom, they stand the chance of doing it again, creating bad trading habits.
It’s important to have good habits in trading! Bad habits are hard to change. Think about it.
Take the “H” away from HABIT and we are left with “a bit”. Take the “A” away and we’re still left with “bit” of it. Take out the “B” and we still have IT!
It’s not worth the effort taking out bad habits. On the contrary, we’ll be far more efficient developing sound habits from the start!
Identifying the type of trader you are gives you an idea how often you will see yourself trading. Whether be it you are a scalper, intra-day, swing, or positional trader, ECS professionally engineered systems will provide you the edge you need in the competitive world of trading.
Frustration
Frustration comes in many forms. Whether be it a trader is frustrated with himself not following his trading plan, or from experiencing draw downs. It happens to the best of us.
We follow our strategy rules religiously without deviation to minimize this. Drawdown frustrations could be managed by taking a short break or taking a breather (I personally just take a stroll in the woods).
Protect mental capital by knowing your strategy’s, capabilities and limitations. Be willing to work within the parameters, accepting it’s not the holy grail. Confidence in your system goes a long way .
If you are having problems sculpting trading plans or are experiencing large drawdowns, ecs.LIVE gives you the best of both worlds. Live trades from CAMMACD system and SWAT strategy are easy to follow with little to no drawdowns.
How to Control Emotions in Trading With Strategy
A good strategy has rules that draws boundaries and minimizes psychological impasses, while building confidence in a trader’s ability to follow the trading plan.
Knowing a system yields positive results on a long-term consistent basis build confidence in trading.
Don’t find the Holy Grail. Find a decent strategy that has withstood the test of time.
Conclusion: Trading Without Emotion
All negative emotions in trading can be managed by adopting systems and strategies designed to deal with these aspects of trading.
Learn to trust a sound strategy when you see one and have confidence to execute it. Not all trades will work out but a sound strategy makes it count when it does.
In the uncertain markets, constantly looking for a new certainty in itself is a form of uncertainty.
No matter which stage you’re at, it is our calling here in ECS to bring you to a stage of unconscious competence.
Until next time!
With you always,
Davin and the team of Elite CurrenSea
Leave a Reply