Emotions can both help you and hurt you. This is especially true in respect of traders and how they cope with emotional aspects of trading.
In our childhood and juvenility we develop certain reactions to our emotions and try to control them. We learn from our parents, teachers, peers and cult figures through observation and comparison.
The majority of people that come to trading face a complete inability to control their actions under the impact of emotions which usually results in negative consequences. It is not for nothing that the trading psychology is considered to be an extremely important component of success in trading.
Why then many of us come across the situations when emotions go out of control when we enter the trading scene.
It is evident that there are many reasons and all of them are individual. Today we will discuss three most widespread reasons of appearance of strong emotions and also three ways to control them.
In this article:
- Unsolved psychological problems
- Surprise effect
- Emotions as a part of efficient trading
- Emotional balance
- Complete suppression of emotions
Unsolved psychological problems
It is a very important factor. In fact, trading is the way of self-understanding and not just a study of markets. Any psychological weaknesses which you fought in the past and also those which you didn’t realize, since there were no situations that could activate them, will come to the surface during trading.
Moreover, these problems will haunt you and interfere with your development in trading until you identify them and get through with them. There is a rather widespread scenario when a trader, who made profit permanently during a long period of time, returned every cent of it to the market. We are sure that many of you had this experience.
It is a vicious circle which often appears due to the absence of a proper preparation for each trading day and for trading in general. You make some counter-productive things instead of preparation for trading. You do not control emotions during execution of a trade and then you start to criticize yourself when you understood that you made a mistake. All these things result in your loss of confidence. And this takes place day after day until a complete disaster.
Trading is a cumulative aggregate of efforts and results rather than just one trade or one trading day. Negative emotions can not only demoralize and demotivate but also cause serious mental and physical breakdown.
Usually the strongest emotions can take traders by surprise immediately before execution of a trade (entry or exit). It is very likely that these are the most tense moments and efficient psychological techniques are a must in such cases.
All the trader’s actions are under the sway of emotions. Emotions will distort reality and urge a trader to act counterproductively.
3 ways to control your emotions in trading
There are 3 ways of keeping emotions down in trading. Nevertheless, you need to think better before making a decision to use one of them, since their efficiency will depend on your personal qualities.
1. Emotions as a part of efficient trading
Some traders will have difficulties in using emotions in their favour during trading but, in fact, there are traders who can do it. Rage, fear and greed make them mobilize their efforts for achieving success. Such an approach allows them to maintain their efficiency. In fact, they are usually not able to trade with profit until they reach their peak emotional state. It is like a fighter who tries to work himself up into emotions before a fight.
2. Emotional balance
Many professional traders use this technique. This method assumes recognition of the moments of appearance of different emotions with the further return to the psychological equilibrium. People constantly experience some emotions and this is a fact. It is important to recognize an emotion before it becomes a problem and completely grasps the consciousness at the stage of its formation. Inability to identify emotions in time means that you, most probably, recognize your mental state too late. The period of return to the state of emotional equilibrium may take some time and the restoration period will depend on the strength of emotions which you experienced.
3. Complete suppression of emotions
Many traders learn about this approach from a big number of books on the trading psychology at the early stage of the trading career. Their authors recommend ‘trading like a robot’. Everything depends on a trader’s character and personal qualities. This approach could be good for some traders but not good for others.
It is difficult to agree that emotions are always good for a trader and that a discretionary trader who neutralizes his emotions loses his advantage in trading.
There are traders that use exclusively this approach in trading and produce excellent results. In order to understand whether this approach fits you, you need to be very honest about yourself.
It is really important to correctly identify the character of those emotions which you experience more often and understand why they appear.
Study and understand yourself before you realise what the emotion control technique to use in trading. Analyze what emotions you experience when something goes out of control. Also pay special attention to those types of market conditions which provoke them. Try to identify behavioural patterns in your emotional reactions. Register all your observations in your notebook.