Prevent yourself from making costly mistakes by staying in control of your emotions while trading.
“The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.” -Famous trader Victor Sperandeo
A proper psychological mindset is arguably one of the most important skills a trader can develop. Unfortunately, it’s something that’s often overlooked by beginners. After gaining some experience trading, you’ll quickly find out how important it is to control your emotions.
Money itself brings out many powerful feelings, especially when you lose (or make) a lot of it in a short amount of time. Warren Buffet: “If you can’t control your emotions, you cannot control your money.” Continue reading to learn the methods myself and many traders use to stay in control of their emotions while trading.
Here are some of the results you can expect from emotional trading
- Selling for a loss at the absolute worst time
- Having FOMO (fear of missing out) and buying at the top
- Being greedy and taking on too much risk
- Overtrading and making too many trades out of boredom, FOMO or greed
- Not trading when an opportunity presents itself due to fear of being wrong
- Thinking your invincible after a successful streak of trades, then finding out the hard way that you’re not
You can be in control of your emotions and still make some of these mistakes, but the majority are a direct result of poor emotional discipline. The good news is that you can avoid making most of these errors just by controlling your emotions. If you’ve never made any of the mistakes on the list please comment on this post, I want to interview you!
The reality is that all traders will fall victim to poor emotional control at some point in their trading career. After all, we are human, well with the exception of Mark Zuckerberg. The key is to identify when you’re not in control of your emotions and correct it immediately, which leads us to the first step.
Identify when your emotions are in control
To identify when your emotions have taken over, ask yourself some “why questions.” “Why am I initiating this trade?” “Why am I selling?” “Why won’t I sell?” “Why did I start this trade to begin with?” “Why would or wouldn’t I make this trade?” If any of the answers are based on fear, greed, impatience, or boredom you’re not in control. Because our emotions are so powerful it can be hard to tell who’s in control until we start thinking clearly and by then the damage is already done. If you have a well thought out strategy and trading plan you should easily answer any “why question” and feel assured that you are in control.
Make a trading plan and stick with it
Create a trading plan or strategy before initiating any trade and stick with it. As mentioned earlier a trading plan can help you identify when your emotions are starting to take over. Think of it like instructions that are being programmed into a robot. Decide how much of your portfolio you will use, where you will set a stop-loss, when you will take profit, etc. Your able to study more and think clearer when you don’t have any skin in the game. That’s why it’s important to make the plan before entering the trade.
Following a trading plan will immediately cut out any emotion. Once your money is on the line, you’ll see how tempting it is to change your plan because A. You don’t want to take a loss or B. You want to squeeze out more profits. Do not do that, stick with your plan. If you find you need to make improvements with your plan, then do so after the fact and not when you’re not in the middle of a trade.
Impulsively making decisions without thinking them through is a major sign that you have let your emotions take over. Slow yourself down, don’t try to make a fortune overnight, take your time and understand the market will always be there.
Many beginner traders go in headfirst and blow up their
Emotions and feelings have a way of making us feel like we’re running out of time and we got to act now. That’s usually not the case, there is almost always enough time to take a few deep breaths and analyze the current situation before acting.
Don’t fall in love
You can fall in love with trading that’s completely acceptable. If your reading this you’re probably already in love with trading and that kind of passion is a good thing. What I mean is don’t fall in love with a single trade or stock. When you’re in love, you become blind to things that you would normally see clear as day. A company could be filing bankruptcy, employees jumping out of the building, the CEO stating “it’s over” and there will STILL be people cheerleading and screaming a turnaround is coming. You can find examples of this on just about every trading forum or chat room.
Long-term investors can deal with some scary issues and still have faith due to good fundamentals, extensive research, etc. However, trading is a bit of a different ball game than investing.
This is how the love story usually begins, you fail to suck it up and take a loss when a trade goes against you. Now instead of taking the loss and moving on, you begin to romanticize the thought of the trade magically turning in your favor. You ignore the warning signs and end up bag holding instead of making money in better trades. Stay in control of your emotions and don’t fall in love with any trade or stock.
Treat trading like a business
You’re in the business of trading and remind yourself that. When you’re working in a business you know exactly what it’s about and what to expect. That should be the same with trading. A pilot doesn’t ask the passengers how to land the plane right? He or she knows how to land it before even being allowed to fly the damn thing. A pilot is also going to be aware of the conditions before the plane takes off and what actions to take if strong winds or turbulent weather appears.
It’s the same when your trading, you should know what you’re doing and know what to expect. Trading involves risk, know how much risk you’re comfortable with. Know the market conditions before you trade. Know when to take a loss and when to let a winner run.
A pilot practices with simulators before flying the real thing. Paper trading is designed to help you get the hang of things before you risk your own capital. Eventually, you will need to fly the real thing. As useful as paper trading is, it can’t teach you everything. If a pilot can stay calm during a bumpy flight you should be able to control your emotions while trading. When you take trading seriously and treat it like a business it limits your emotions.
Think of a bad trade as just a part of business, they’re going to happen, learn and move on. Of course, if the majority of your trades are bad, then business isn’t very good. When business isn’t good, take a step back and try to identify the problem.
A quick recap of the tips discussed
- Know how to identify when your emotions are in control
- Make a trading plan and stick with it
- Slow down, be patient and wait for quality setups
- Don’t fall in love with any stock or trade
- Treat trading like a business and know what to expect
While a lot of losing trades stem from poor control over our emotions, we can’t blame every loss on emotions. But if you’re able to keep them under control it makes it easier to recognize other culprits and continue to improve.
Fighting your natural instincts and reactions is a difficult task, but with enough practice and persistence, you can start to control your emotions while trading.