One of the biggest mistakes that a trader can make is to allow emotion to over-rule his decision-making. Human nature sometimes does not allow us to admit that we are wrong. There can be a lot of emotion involved with trading.
Never believe that every trade will have a positive outcome. As a matter of fact, starting a trade with the mind-set that you are bound to have a positive outcome is a recipe for disaster. Thinking that way will make it tough to close losing positions, as you ignore any suggestion that you are not right. It is best to recognise from the very start that you will not get every trade right.
If we start feeling bad for every trade we lose, we will soon start losing our faith in trading as well.
What Is The Trading Scenario And What Is Its Relationship With Emotions?
It is well known that traders who feel less pressure around earning or winning money make better and wiser decisions. If you start disregarding the profit and loss part and concentrate on smart trading, you will very likely do better. The energy that is lost by worrying will be detrimental to decision-making. A system that takes the emotions out of trading, generally allows for better performances.
If you make a living from trading, it will be a daily event to handle the reality of making money, but the emotional side of this will need to be addressed and to be handled.
Never trade anything that you cannot afford to loose. Just imagine the worst stock market crash in history. If that happened, what would happen to your trading profile? Would you be able to handle the financial hit? It is obviously harder when a lot of money is involved so it is always a better choice to scale back and limit your trade to just what you can afford. This way, if things go wrong,it will not be a disaster.
Why Are Emotions So Important?
Emotions are actually an inevitable part of trading, especially for the beginners. However, these feelings can prevent you from taking objective decisions. For this very reason, learning to control your emotions is essential to trade successfully. The emotions that have a negative effect on trading mechanisms are mainly greed and fear. Both of these can cause the trader to deviate from the set plan that can result in issues such as revenge trading and ego.
Emotions In Trade That Affect The Trader’s Decisions And Profits
Traders approach the market every day with a psychological mind-set and emotions. New traders generally enter the trades with a belief that does not apply to reality. This is why sometimes; new traders do not make the right decisions. In other words, they make bad trading moves, as they trade with inaccurate beliefs and become subject to the emotions of greed and fear.
When an investor fears losing a trade, he will try to avoid that. This can actually increase losses. When traders experience the emotion of greed, it means that they are trying for too much profit and have deviated from their plan. For instance, traders may place the profit target in compliance with the trading strategy. Immediately this means that, as with placing stop loss, there is a fundamental or a technical reason to do so.
When greed influences the mind of a trader, he does not close the trade strategically; he goes for more. What often happens, as a result is that trade can turn against him. He reduces the profitability of the strategy as he tries to increase the profit, driven by greed.
Revenge trade is also bad for a trader. The trader chases the losses that he has made so far. In that case, the trader becomes focused on winning money back, which in some cases can result in more losses.
How Should A Trader Achieve Balance Between Emotions and Trading?
It is better to trade with some tried and tested methods. You are more likely to remain calm under pressure if you have full confidence in your plan or strategy. If the strategy has not been tried in the past, it may result in doubts that allow fear to overwhelm a trader.
The trader should focus on making a trading plan in his area of interest only. If a trader is interested in telecommunications, or in any other industry, it makes sense to be an expert in that industry.