Emotional trading

Emotional trading

In our opinion, emotional trading is perhaps one of biggest contributions for why time and time again traders in the Forex market consistently fail. The inability to control how you react with method but rather emotion simply leads to wrong decisions being made and when your decision can cost you money, you want to ensure that they are the correct ones right?

Trading is simply 80% psychology and for that reason your emotions will play a huge role as to how you react and what action you take in certain situations. It is not just new traders that have a problem with controlling their emotions but also experienced traders. You may have heard the term ‘leave your emotions at the door’ and in our opinion this could not be further from the truth, as you must learn how to control your emotions so you do not make impulsive decisions that you will regret.

The reason for why you need to simply leave your emotions at the door is so that you can react rationally not irrationally, as every decision we make in trading can ultimately lead to us making money or losing money. Why do we have emotions in trading? The answer to that is because you will have emotional attachment to the monetary value of your trading account i.e. you are attached to the money that your trading account holds and the reason for that is because you have had to sacrifice your time to attain it or think what you could do with that money rather than trade it. This then brings us onto the first emotion, which is ‘Fear’, as many traders are scared to take trades fearing that if they are wrong they may lose money.

However, if you are using a tested plan then you should not feel this emotion as you should know as long as you follow the process in the long-term you will be profitable regardless of short-term losses.

In trading, there are two common types of fear; 1. fear of missing out, 2. fear of getting involved. Fear of missing out is when you are scared you will miss an opportunity and so you get involved in a setup when you know that you should not have taken the trade because you are simply scared of missing a setup in where you could make money. Fear of getting involved is when you are scared to take a trade because you worry about the potential outcome of losing money and so you do not take the trade because that fear dictates your reactions.

The question is how do you combat fear in your trading? The answer is to only trade with a tested trade plan that you trust and know the expectancy in terms of results and performance for using such a trade plan i.e. out of X amount trades Z will be winning and Y will be losing, how much you stand to lose in the process and how much profit you expect to make at the end of it? Once you know what to expect in your trading then many emotions dissolve as you already know the expectancy in the short-term and both the long-term and this can empower a trader. The reason for why emotions disappear for a trader when they implement a trade plan, which has been tested and proven to provide a profit in the long-term perspective, is one key word…trust!

You need to trust the process you are involving yourself in and that by doing so regardless of losses that you should remain profitable, many disregard trust in trading even though it is the most important thing for a trader to experience. You must remember you are trading your own capital so that then means all responsibility is on you, therefore you need to ensure that whatever process you are using to trade the market, in the long-term you will be profitable. We have briefly discussed that humans can’t trust themselves due to conflict of interest from emotions in which will result within inconsistency within your trading, thus causing performance to decrease. Therefore, by using a rule-based approach in your trading it will remove emotions, as a layer of subjectivity will be removed from your trading and how you form an opinion on the market. Once a trade plan has been tested and you have an expectancy for how it should perform and know that in the long-term you will be profitable, then fear is removed because you should no longer be second guessing a setup or chasing a setup. If your trade plan rules allow you to enter a setup then you must enter such a setup, but this time you can do so with confidence as opposed to fear as you know that regardless of short-term outcome of that trade that you are following a process in which you know will lead you to be profitable.

Another emotion that ruins a trader is greed. Why does greed ruin traders you may ask? Simply because it leads to other inflated emotions such as arrogance and believe us when we say that there is a fine line between being confident and arrogant in trading. A confident trader is when they know there is a high probability that their analysis or trade setup might be correct but they also know that the market can do whatever it wants, when it wants and realise that they have no control of what might happen next. An arrogant trader is simply when a trader who says ‘the market will now move lower’ or who uses other language to impose their will onto the market as they are certain for what will happen next and never admit when they are wrong.

Many traders often overshoot profit target projections and set unrealistic expectations for what one setup can provide or if target ones are achieved then they look for more profits to be made when they should have just exited the position a long time ago. Now don’t get us wrong, there is nothing wrong with looking for extra profits in trading as you should look to maximise the potential for a trade setup but what happens with many is that their ego kicks in as they were correct and then proceed to believe that they are a god and cannot be proven wrong. What then happens is that price action begins to reverse but the arrogant trader remains adamant they their price projection will be achieved and so they leave the trade open as profits slowly decrease from what they once were. The result usually ends up with the trade being closed at a much lower profit from what it once had been or being closed in a loss. Now how do you think the trader will then feel? Angry, frustrated, annoyed, disappointed, stressed and the answer is more likely than not all of them. Trading is the only career where you can go from feeling like a god to an idiot in the matter of minutes. Although, if you trade with specific rules, that tell you exactly where to look for profit targets, secondary targets along with when and how then you can be consistent all you are doing is following a process. The result from doing so is that you will become a confident trader and not an arrogant one, as your emotions will not be allowed to be involved and you will not experience any feelings we previously just mentioned.

In trading, while indeed you can remove a layer of subjectivity in your analysis and emotions for when you are involved in a trade we cannot eliminate them as trading is simply based on your opinion for what might happen next in terms of future price discretion and it is impossible for a trader to not feel emotions as it is a psychological process. However, the key is to eliminate your emotions from decision making and to make your analysis systematic to ensure consistency so that you can realise the true potential of the plan you are using and to make your trading easier for you.

Trading is a roller-coaster of emotions as you will experience both highs and lows within your career, but if you follow a specific process that tells you exactly how, where and why to react and what actions need to be taken in certain situations then it will make the process of becoming a profitable trader that much easier for you, as consistent actions result in consistent results.

The key is to control the mind and not let your emotions react on your behalf but react with justification and causation in where every action you take will lead you in the direction in becoming a profitable trader.

Take care and trade safe,

Fair Exchange FX.

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