Updated: Aug 6
The 3 Most Common Emotions Traders Experience
A common cause of fear is trading too big. Trading with improper size magnifies volatility unnecessarily and causes you to makemistakes you normally wouldn’t make if you weren’t under the stress of risking larger losses than normal.
Another culprit for fear (or nervousness) is you are in the ‘wrong’ trade, meaning one that doesn’t fit your trading plan.
Conviction and excitement are key emotions you’ll want to feed off, and you should feel these in every trade you enter. Conviction is the final piece of any good trade, and if you don’t have a level of excitement or conviction then there is a good chance you are not in the ‘right’ trade for you.
By ‘right’ we mean the correct trade according to your trading plan. Good trades can be losers just as bad trades can be winners. The idea is to keep yourself winning and losing on only good trades. Making sure you have conviction on a trade will help ensure this.
If you find yourself only wanting to take trades that you deem as possible big winners, you could be getting greedy. Your greed may have been the result of doing well, but if you aren’t careful you may slip and end up in a drawdown.
Always check that you are using proper trade mechanics (i.e. sticking to stops, targets, good risk/management, good trade set-ups). Sloppy trading as a result of overconfidence can end a strong run.
How to Control Emotions
Create Personal Rules
Setting your own rules to follow when you trade can help you control your emotions. Your rules might include setting risk/reward tolerance levels for entering and exiting trades, through profit targets and/or stop losses.
Trade the Right Market Conditions
Staying away from market conditions which aren’t ideal is also prudent. Not trading when you aren’t feeling it’s a good idea. Don’t look to the market to make you feel better; if you aren’t up to trading the simple solution may just be to step away.
Lower Your Trade Size
One of the easiest ways to decrease the emotional effect of your trades is to lower your trade size.
Establish a Trading Plan and Trading Journal
In terms of fundamental factors, planning for various outcomes in the runup to key news events may also be a strategy to bear in mind.
The results between new traders using a trading plan, and those who don’t can be substantial. Compiling a trading plan is the first step to attack the emotions of trading, but unfortunately the trading plan will not completely obviate the effects of these emotions.
If you're relaxed and enjoy your trading, you will be better equipped to respond rationally in all market conditions.