Overcoming the emotional stress of trading
Tags: day trading, emotion, equities, forex, futures, options, trading Trading Insights
Traders, whether they are trading stocks, currencies, or any other financial instruments, must learn to control their emotions if they want to be successful. This is because emotions can often cloud judgment and lead to poor decision making, which can be costly in the fast-paced world of trading.
One way for traders to control their emotions is through the use of risk management techniques. This includes setting clear and defined risk limits for each trade, as well as having a solid trading plan in place that outlines the steps to be taken in various market conditions. By having a plan and sticking to it, traders can remove some of the emotional decision making from the equation and rely on a more systematic approach. We're amazed, after being in business for over 13 years. When we ask people to show us a copy of their trading plan, on average fewer than 5% of people we meet who describe themselves as day traders have an actual physical written out trading plan with any type of a statistical edge. Most people are 'shooting from the hip' and basing trades on 'in the moment' decisions that fail quite often.
Another way to control emotions is through mindfulness and self-awareness. Traders should take the time to recognize and understand their own emotions and how they may be affecting their decision making. This can be done through mindfulness practices such as meditation, which can help traders gain clarity and focus, as well as through self-reflection and journaling. We have many customers who will actually monitor their emotions and ask themselves each day before they trade 'how do I feel?' They measure themselves objectively (physically and mentally) and rate their wellbeing. If they are less than a 7, they will only trade in SIM that day. They build in this emotional/physical 'circuit breaker' to make sure they're only trading when they are mentally optimal, and not prone to self sabotage that day.
Traders should also be aware of their own biases and try to avoid letting them influence their trades. This includes avoiding overconfidence, which can lead to overtrading, as well as avoiding the sunk cost fallacy, which is the tendency to continue investing in a losing trade in the hopes of recouping losses. Instead, traders should focus on the potential future returns of a trade rather than the past performance or emotions associated with it.
It is also important for traders to remember that they cannot control the market, and it is important to accept this reality. Trying to fight the market or hold onto a losing trade can lead to emotional decision making and ultimately result in further losses. Instead, traders should focus on controlling their own actions and making decisions based on logical analysis and their trading plan. One of the reasons we developed our predictive software - was based completely on this idea. By understanding that markets had an element of institutional 'manipulation', we are able to study what is likely to happen in the future, versus fighting the market and trading it the way we would like it to go.
To further control their emotions, traders can also seek the support of a mentor or a trading community. Having someone to discuss trades and strategies with can help traders gain perspective and avoid making emotional decisions in the heat of the moment. It can also be helpful to have a support network of fellow traders who can provide guidance and encouragement.
In summary, controlling emotions is crucial for traders in order to make sound and profitable decisions. This can be achieved through risk management techniques, mindfulness and self-awareness, avoiding biases, accepting market realities, and seeking support from mentors or trading communities. By learning to control their emotions, traders can improve their chances of success in the fast-paced and often volatile world of trading.