Emotional Trading

Emotional Trading and Psychology Explained

7 min read

Emotional trading is one of the biggest issues many traders struggle with. Trading requires learning the technical charts and the ability to overcome your emotions. Anyone can learn the technicals. They aren’t hard to learn if you put in the proper study time and effort. The most challenging part for most traders is overcoming their emotions. They lack the emotional discipline required to become an effective and profitable trader. 

I know from experience. When I was a complete “newbie,” I made many mistakes. I’ll never forget my friend calling me and telling me to buy an oil stock 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 in the green. I quickly bought the same stock as fast as I could… 

My hands were sweating, and I was nervous, putting much of my buying power into the trade. I wasn’t very good at technical analysis (I might have 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, no rules, no training, and no mentor, your emotions influence you to buy or sell.

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?

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 will 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.

Emotional Trading

Clear Your Mind Before Trading 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? We could be in many situations that can contribute to a clouded mind and mess with our 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 Between Trading Sessions

Sitting or standing all day isn’t healthy, as are charting, trading, and searching for the next trade setup. It often leads to over-trading,  which leads to mistakes and unnecessary risk.

Most successful traders try to trade for an hour or two a day. 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 trader’s nap, and 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 anytime. Do not worry; you will miss an excellent trade. There will always be another trade. We picked up a book about yoga by one of our trade room members. It’s an awesome way to relax between trading sessions. Check out Yin Yoga: Essential Poses and Sequences for Balanced Energy

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—I regret missing out. Instead of sticking to the charts and my rules, I just traded on emotions. So, it would be best to 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.

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DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading

Stop Staring at Your P&L While You Trade

Watching how much you are up or down can be an emotional ride. You must know your buying power, margin, and other factors affecting 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, nothing might be 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 until I finish my trading.

The CHARTS dictate my actions on whether I should buy and sell – NOT my P&L! 

Final Thoughts: Emotional Trading

It’s so important to keep a positive mindset when trading. If you lose your sense of humor, are stressed out, or let fear or euphoria get a hold of you, you’ll have a bad time. Here are some things you can do to stay positive:

  • Focus on positive things going on in the market and 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 keep in check actively. Every day. We must be vigilant, aware, and accepting of our emotions. How do I trade? Like a robot: This doesn’t mean we must accept bad behavior from ourselves, our trading, or others! If you need more help creating a trading system, we’ve got you covered. Check out our free online trading courses to get started. 

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