How to Overcome Emotional Trading
Emotional trading is one of the biggest issues a lot of traders struggle with. Trading requires learning the technical charts, as well as the ability to overcome your emotions. Anyone can learn the technicals. They aren’t very hard to learn if you put the proper study time and effort in. The most challenging part for most traders is overcoming their emotions. They lack the emotional discipline that’s required to become an effective and profitable trader. Watch our three part series on the psychology of trading and how to trade the right way.
I know from experience. Back when I was a complete “newbie” I made a ton of mistakes. I’ll never forget my friend calling me up and telling me to buy a oil stock that he saw on fidelity’s research tool.
I could hear the excitement in his voice. He was so excited about his profits from this trade. He had only been in the stock for half a day and was already well in the green. I quickly bought the same stock as fast as I could…
My hands were sweating, I was nervous, putting a lot of my buying power into the trade. I wasn’t very good at technical analysis, (alright I might of been bad) but that didn’t stop me.
I just wanted profits too. Greed was in control. My friend was making thousands and I wanted to as well. Little did I know he had bought the opening range breakout…I don’t even think he knew!
Well, readers, what do you think happened next? I lost my shirt. The trade was red from the moment I bought it. Shoot, this wasn’t investing. Investing I understood.
This was gambling! I had no system. With no system in place for trading, with no rules, with no training, no mentor, the only thing influencing you to buy or sell are your emotions.
What have I learned in all my years of trading? If you break your rules, the market will break you. I learned the hard way. I lost 800 dollars in one day. The same day, my friend made 4,000. Boy did I feel stupid.
Breaking The Emotional Trading Cycle
It didn’t take me long to realize I needed a system to manage my entries and exits. I spent hundreds of hours learning, reading, practicing and perfecting my trading.
All of that experience has certainly helped me not be an emotional trader. Now, we can’t fit that all in one blog post.
So instead we are going to talk about things you can do while you are mastering trading that will keep you from getting whipped around the emotional roller coaster while you trade.
Clear Your Mind Before You Trade…Emotionally
What’s on your mind? Do you feel stressed out in general? Are you trading because you NEED to change something about your life right now?
Are you under pressure to make an income from trading? There are so many different situations we could be in that can contribute to a clouded mind and mess with your emotions.
If you are distracted by something personal in your life, it’s probably not the best idea to be trading. It’s a stressful enough profession (sometimes more than others) so do your best to clear your plate before you hit the buy and sell buttons.
Take Breaks In Between Your Trading Sessions
It isn’t healthy to sit or stand all day, charting, trading, searching for the next trade setup. It often leads to over trading, which leads to mistakes and unnecessary risk.
Most successful traders are trying to trade for an hour or two a day at the most.They might spend another hour or so charting and reading to prepare to trade, but they certainly are not spending 7-8 hours at their trading computer.
Exercise, take a traders nap, grab a healthy snack. Take a lap around the yard. The market will always be there, you are in control and can walk away from the market at any time. Do not worry you will miss an excellent trade. There will always be another trade.
Don’t Let FOMO Or ROMO Suck You In
Remember the bit in the beginning about me chasing the trade my friend made and losing money? Yeah. I had FOMO. Fear of missing out.
I also didn’t want ROMO. Regret of missing out. Instead of sticking to the charts and my rules, I just traded on emotions. So, you must learn to tune out the noise.
Avoid getting caught up in rumors, twitter or the usual fighting between the Stocktwits bulls and bears. Sure, it’s useful to know what other people are thinking. But do not base your trading plan around what others think.
Stop Staring At Your P&L While You Trade
Watching how much you are up or down can be an emotional ride. Obviously you need to know your buying power, margin and other factors that will affect your operation.
However, you should know these things without having to stare at it. Stick to your trading system based on your TRADE. Not how much you make. If you’re closing trades by how much you are up or down, there might be nothing wrong with this.
But it could also be influencing you more than you know. I stick to my 2:1, and more often 5:1 risk reward ratio on my trades. I don’t worry about my P&L till after I am done with my trading.
The CHARTS dictate my actions on should I buy and sell – NOT my P&L!
Mindset – Stay Positive
It’s so important to keep a positive mindset when trading. If you lose your sense of humor, if you are stressing out, or letting fear or euphoria get a hold of you, you’re gonna have a bad time. Here are some things you can do to stay positive:
- Focus on positive things going on in the market and in your life, even small victories
- Keep a trading journal. It’s important to take notes on your trading day and reflect
- Avoid negative people, surround yourself with a positive environment and people
- Keep your workspace clean. A clean workspace leads to more focused thinking
- Try to keep things fun – If you’re doing something that isn’t enjoyable day after day, why do it?
In conclusion, emotional trading is something we have to actively keep in check. Every day. We must be vigilant, aware, and accepting of our emotions. How do I trade? Like a robot: This doesn’t mean we have to accept bad behavior from ourselves, our trading or from others! If you need more help on creating a system for trading, we’ve got you covered. Check out our free online trading courses to get started.