In this article, we will look at how your mood and psychology can dictate how you perform in the markets and how it can have a positive but also a negative effect on your trading.
To address this problem, we need to establish and reiterate that trading is heavily based on psychology as it is the opinion and reactions from other market participants that dictate fluctuations in price. In your personal trading, every decision you make, reaction and opinion is formed though a psychological process not physical and so to ensure you are making the correct decisions that will ultimately benefit you it is imperative that you ensure you are in a sound state of mind.
One keyword in trading that ultimately dictates your performance in the market is that of your focus, as our job as technical traders is to interpret the price action we see on the charts to make a high probability guess on where prices are likely to go next and how we can get involved to capitalise on such moves. Therefore, we need to ensure that we are laser focused when we are analysing price action as we have previously stated that trading is pure psychologically based. So, if we are not focused to the best of our ability we could easily miss something on the charts such as a level of structure, candlestick reversal pattern that could be a signal to not take a trade. You must remember that your role is to interpret what you are looking at and if you are not focused you could miss something on the charts that could result in you getting involved in a losing trade or on the other side of the coin not getting involved in a winning trade. The markets are fast and good setups do not last forever along with this situations can change very fast as well, therefore when you have an opportunity to get involved in a setup that provides you with an edge that you do not take too long to get execute it. For example, let’s say that you are looking to get involved in a day –trade position and are looking to go long on GBP/USD at 1.3050 with a manual entry to ensure a 1:1 R/R and you are monitoring price action but you then become distracted as you begin to drift off and daydream, once you snap out of your daydream and look at the setup once more 1.3050 has already been tested and prices have already rallied without you as GBPUSD is now trading at 13065’s. What happens next is that you begin to panic and worry that you have missed the trade, so what do you do justify another reason for why you can get involved in the market as prices have already rallied and you begin to get FOMO (fear of missing out) on the setup. The reason for why you begin to justify yourself is because you do not want to admit you are accountable and the reason for why you missed the trade in the first instance and instead of admitting this you look for a way out of admitting fault on your behalf by still getting in the trade, thus avoiding accountability.
Now why is this a bad scenario? Well the answer is simple, because for one you were distracted and not focused therefore missing an initial entry into the setup but instead of waiting for the setup to give you another chance you forced entry into the setup by coming up with another entry reason to go long at 1.3065’s. The result of which puts your R/R an inverted state as 1.3050 was the minimum entry price for a 1:1 but more importantly you were not disciplined with your rules and violated them by getting involved in a trade at a entry price to which you not meant to do. However, the thought of admitting fault was so great you had to get involved and by doing this you were not accountable for your actions and so no lesson was learned from this experience. The shocking thing about this scenario is this is exactly how a lot retail traders conduct themselves in trading as they fail to be accountable for their actions and so they never learn for what they did wrong nor do they trade with discipline with their rules.
Now let’s discuss your mood, if you are in a bad mood do you think that this will impact your trading positively or negatively? Well in hind sight you of course would say my mood would not affect my decisions but for how majority of retail traders conduct themselves it would be no surprise that many allow their mood to dictate their actions and the reason for that is because they allow their emotions to become involved in their trading.
If you have a losing a trade and also in a bad mood do you think you walk away with the loss or will you want to make back the money as your opinion is that the market was against you? The answer for many even though they would not admit it is that they would want to revenge trade, which means getting involved in the market by anyway possible to try and recuperate your most recent loss. However, as you were already in a bad mood and have become even more agitated by incurring a losing trade your concentration as slipped in further and you literally just have tunnel vision looking for any reason to get involved in the market and this means you are disregarding all other relevant information that could be signalling not to take the trade. However, as you are so committed to win back your previous loss you eventually get involved in another trade as you disregard all levels of discipline to your trade plans rules and for a short moment you might feel full of yourself as you believe you will now make back your previous loss. In this moment in time there is no winning scenario even if the trade is to be a wining trade, as you have again not been disciplined to your rules and discredited them by forcing entry into a position by thinking you know what the market will do next. Consistent actions lead to consistent results and if this scenario was to play out with a winning trade, what will happen the next time is that you will repeat the same actions as it worked before you belief is that it will simply work again.
However, the result for this revenge trade is that market does not do what you thought it would and you incur yet another less and you become enraged as you begin to believe the market wants to see you fail as it has some form a vendetta against you. What happens next, do you A)Walk away from the market for that day with the two losses, review what happened and put it down to experience to not do that again by learning from it or B)Revenge trade once again but this time enter with a bigger position size to try and recoup the two losses you have now incurred? The majority would not admit it but Bwould be the most likely scenario to happen next as traders get so angry, frustrated and arrogant that the market is not doing what they think it will do. The end result from this style of trading is that you blow your account as thousands have done before you and continue to do so, as one losing trade spirals into many losing trades as their emotions simply cannot be controlled and they do not when to stop. This exact scenario is how trading can be seen as a form of gambling, as you can become fixated on being correct and proving the market wrong in a way that you are simply better than the market itself.
Trading itself is not gambling as it does not care if you participate or not as it is its own entity, however your own psychology is very different as the human mind can easily become very addicted to anything it wants. This is the reason for why a trade plan with specific rules is imperative in your trading to ensure you do not behave in this way, as you should be disciplined with following your rules and never violate them.
Your concentration only needs to slip for a short period to massively damage your account or even lose of all the funds within it and is the reason for why when you are actively looking at the charts to get involved in setups that you provide you undivided attention.
The hardest part of trading is separating your emotions and this is hard because you have an emotional attachment to the money in your account, but the first way to begin detaching yourself is by using a trade plan that you know by following and trading will produce a positive ROI. As your trade plan removes a lot of subjective behaviour and self-opinion on what the market will do, as you will not have any desire to care as your trade plan should be focused on exploiting repetitive patterns and frequent moves in the market that provide an edge.
Try to remember what is at stake when you get involved in a trade, as there is risk in the form of your money from your account but also remember this when you want to react when you incur a losing trade, as the risk remains all the same.
If you are having a bad day, if you have had an argument with your spouse, parents or what ever reason for why you might be in a bad mood just take the day away from the charts. As by not trading at all you are simply preserving your capital to trade for that tomorrow and that is number one goal of any professional trader to preserve capital, as you can’t trade if you do not have any funds left in your account. Recognise and be accountable for when your focus is not as what it usually is, as a simple mistake can be very costly in this business and it is part of your job of a trader to be accountable for your actions and to take ownership.
Always remember trading is a job and should be taken very seriously and treated with respect, therefore you should always step into the markets every time with the correct attitude. The market demands your full attention and discipline and if you do not give it, the cost will be your hard earn money and that is on you.
Until next time,