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Are you a trader? Then chances are you’ve experienced trading emotions in one form or another, and you're asking "how can I manage trading emotions?".
Trading can be quite an emotional rollercoaster for many traders, new and seasoned. It’s especially so if you are trading as a full-time job and your monthly income is reliant on the success of your trades.
If you’ve just started as a trader you may have discovered that you've been making the mistake of trading with emotions.
Feeling like you’re being controlled by your own emotions can be stressful, especially when you're trying to trade with a rational and focused mind. Fortunately, in this article, we'll review how to manage emotions while trading and give you insights into what you may be thinking and feeling while trading, so you can manage your trading emotions better.
Read on to learn more.
What Is Emotional Trading?
Whatever style of trading you choose to follow, emotional trading, more or less, is the same. Trading emotions happen when an investor or trader allows their emotions and feelings to impact the way they make decisions when they're trading.
Even though emotional trading can be helpful sometimes, it's usually not a good thing to mix emotions with trading. Fortunately, by understanding what these emotions are, you can more easily deal with them.
Additionally, using the strategies we cover here will help you deal with these emotions and ensure that you aren't allowing your emotions to take over when you're trading. So let's dive into how to manage trading emotions by first becoming aware of theses emotions.
What Are the Different Types of Trading Emotions?
Even though there are a great variety of emotions a person can feel when they're trading, there are six that are the most common. These include fear, greed, hope, anxiety, boredom, and frustration. We'll review each of these now so you understand how they work in the context of trading with emotions.
Trading Emotion No.1: Fear
Fear is one of the most common emotions felt when trading. The problem with feeling fear while trading is that it can cause behavioral biases that cause mistakes in trading. For example, let's look at what happens when a trade begins turning against you.
If you feel fear, it could cause you to delay in realizing that you're experiencing a loss. As a result, you could lead to an even larger loss.
As for trades that are profitable, fear creates another problem. If fear takes over, you could close out earlier than when is best, out of a fear that there might be a reversal in a trend, for example.
Trading Emotion No.2: Greed
Another emotion that's related to trading psychology is greed. Of course, greed can be a good thing ‒ pushing traders to be more daring in terms of trading, helping them look out for and identify attractive opportunities in trading. It can also help them in trying out a variety of trading strategies.
However, greed can also lead to a trader making trading decisions that are too impulsive and that aren't good. When you're driven by this emotion, you forget all about smart, safe risk management principles. Instead, you focus completely on profit.
Greed also feeds your gambling mindset. This mindset allows impulsive decision-making to lead the way instead of rational thinking.
Trading Emotion No.3: Hope
Hope is another emotion that many people feel when they're trading. Hope can muddy your judgment when you're in a bad position in trading. For example, if there's a trend that seems to be going against you, hope might cause you to hold out a bit longer.
However, by doing this, you're risking losing even more money. Hope can also cause you to open up trades that are too large for you to afford. This can also lead to a great loss.
Trading Emotion No.4: Anxiety
Another emotion that people often feel when they're trading is anxiety. However, this is an emotion that can come in handy. Sometimes, if you're feeling anxious about a trade, it might mean that it wasn't the right trade to make.
So if you're feeling anxious, listen to it and re-evaluate the position you're in. However, make sure that anxiety isn't simply a worry that might cause you to exit a trade that's actually a good one.
Trading Emotion No.5: Boredom
Boredom isn't an emotion, but more of a psychological state of mind. However, since this is something that happens to you when you're trading, it's important that we cover it.
Boredom can occur when you've gotten used to trading and treating it like it's a routine process. You might end up trading, over and over, the same markets without making any thorough analyses. The problem with this is that you might end up missing the best exits and entries.
Trading Emotion No.6: Frustration
Another emotion that can negatively impact your trading is frustration. It often occurs when traders make trading mistakes. Whether they've risked an amount of money that's too large, broken their own rules, or missed a trade, frustration can end up taking over.
However, frustration only intensifies your problems and reinforces your negative patterns. So, instead of allowing it to take over, you need to learn to control it. Then, you can shake it off and focus on what matters: trading.
How Do Traders Deal With Trading Emotions?
If you find that emotions overcome you when you're trading, you need to learn to relax. Sounds pretty cliche, but cliches are cliches for a reason: because they’re true! Staying relaxed can be easier said than done, given that trading has so much risk. However, by finding ways to calm down, you'll be better at facing challenges and making trading decisions.
Try stepping away from your computer, stop looking at your trades for a few minutes, or hours, and do something that helps you clear your mind. Exercise and moving your body usually helps to get the blood flowing and get your mind ready to focus again.
How Do I Stop Being Emotional When Trading?
To keep yourself from being emotional when trading, there are several trading tips you can apply. These include establishing rules of your own, analyzing market conditions, lowering trade sizes, and keeping a journal in which you write about your trades and emotions.
Establishing Rules of Your Own
By creating rules of your own regarding trading, you can more easily keep yourself from being too emotional when you're trading. For example, you can create tolerance levels for risk/reward, for risk management strategy, exiting trades, and entering trades.
These rules can also include using take-profit and stop-loss orders religiously.
Analyzing Market Conditions
Traders who have a lot of experience, or who trade as a full time job, know that a volatile market can be a good place for finding good trading opportunities. They're also aware, however, of the higher risks that high volatility causes. But they know how to manage these higher risks calmly because of their experience.
If you want to keep yourself from being emotional, it's a good idea to analyze market conditions and stay away from markets that are highly volatile. This is especially important if you don't have much experience and/or knowledge yet.
This is because these markets bring about drastic price swings. In addition to potentially causing big losses, these markets can also cause emotional mood swings.
A great way to understand market conditions is to get the right information from the right place. For example, at Prime Index, we offer a Telegram Channel with trading signals. To join, sign up today.
Lowering Trade Sizes
One of the easiest ways to lower the emotional stake of a trade is by making it smaller. After all, when you do this, there's less at risk, so there's less for you to get emotional about. You'll feel less fear and less stress when you're trading.
Keeping a Journal
By keeping a trading journal, you can track your trades as you get more experience. In addition to helping you become a better trader (by analyzing and learning from your losses and successes), this will help you feel a bit more in control. As a result, you'll feel more in control of your emotions.
Is Emotional Intelligence Good for Trading?
Emotional intelligence is incredibly helpful when it comes to how to manage trading emotions. This is especially the case if you find yourself feeling emotional when you're trading to the point where these emotions are having a negative impact on your trading.
Emotional intelligence is the ability to recognize one's own emotions and learn how to handle them, as well as the emotions of others.
Self-awareness is a helpful skill in trading. This is because, whether you're stressed, fearful, or hopeful, you'll be able to recognize that this is ultimately an emotion and not a rational thought.
As a result, you can put those emotions aside. Then, they'll have far less of an impact when you're trading. Instead, you'll be able to think more rationally when you're trading.
Managing Your Trading Emotions
The way how to manage trading emotions can be found by using a few key strategies. These include not acting out when you're angry, not sticking to your positions only because you chose them originally, following each of your trades with breaks, and more.
Not Acting Out When You're Angry
If you find that you're angry, it's important to wait until your anger passes instead of acting out. One of the biggest mistakes you can make, otherwise, is a "revenge" trade. This is when you jump into recoup immediately after a loss. Instead of doing this, wait for the anger to dissipate and use your trading journal before getting back into trading.
Changing Your Positions (When It's the Right Choice)
One of the negative impacts your trading emotions can have is that they can cause you to stick to your positions only because you chose them originally. But this is only stubbornness and can lead to you delaying exiting a trade you should be exiting out of.
Avoid this problem and change your position when it's the right choice, instead of allowing stubbornness to make that decision.
Follow Each of Your Trades With Breaks
Something that can make the emotions of trading overwhelming is the fact that it's easy for trading to feel like a nonstop process. However, you can stop while you're trading, and doing so will help you feel calm and in control of your emotions.
To do this properly, follow each of your trades with breaks. Step away from your desk after you've made them. Then, come back and study your trading journal before making your next trade.
Don't Constantly Track Your Profits and Losses
When you're trading throughout the day, it can be easy to obsess over every profit and every loss. However, this will only lead to you getting very emotional about when you're doing well and when you're doing badly.
Instead, you should focus on your general trading strategy. When the end of the day arrives, you can take a look at your profits and losses to see how you did.
How to Manage Trading Emotions to Build a Strong Trading Mindset
There are several ways you can build a strong trading mindset. First of all, you should create a morning routine that's effective. For example, you can meditate or work out early in the day so that, when you start trading, you'll feel ready to trade with a clear mind.
Educating yourself about trading is another way. By having a financial education, you'll feel more secure about the trading decisions you make.
It is also helpful to observe others. If you see other traders using strategies successfully, emulate them. On the other hand, if you see anyone making mistakes, avoid making those.
Finally, it's helpful to remember that the trading market isn't moral or immoral. It's amoral.
Losses have nothing to do with how good someone is at trading. Even the best traders experience losses from time to time.
So if you experience losses, don't be hard on yourself. Don't allow the fear of losses to take control, either. Instead, stay objective and remind yourself that they're all part of the experience of being a trader.
Want to Learn More About Trading Emotions?
Now that you've learned about trading emotions, you might want to dive into more trading educational topics. Maybe you want help figuring out how to keep a trading journal you're looking for, financial education, or trading tips that will make you feel more in control when you're trading.
Whatever information you need, we can help through our Prime Index blog. On our blog we offer expert advice and tips to help you grow in your trading career.
We also provide an insider trading signals channel on Telegram to keep you informed. To join, sign up today.
