5 Simple Ways to Control Your Emotions

When Trading
Trading

Learning

Psychology

May 2, 2017
0
Its easy to forget when dealing with complex trading algorithms and techniques that we are all
human beings. Whether we like it or not we are attached emotionally whenever we have money
vested in the markets.

The emotional trader forexop

While we might have automated systems that pull the trigger, its still us that have to live with
the consequences.

One of the biggest challenges we face is keeping our emotional state of mind in check and
preventing it from following the path of least resistance. The easiest path is generally the crowd
response and the one most likely to result in a negative outcome.

Though our emotions cannot be detached from our decision making processes, we can try to
understand how they are likely to influence our thoughts and behavior.

Here are some of the emotional challenges we all come up against when trading in financial
markets.

Challenge 1: Dealing with a losing position

No matter how diversified and well tested a strategy is, there will always be times when its
sitting in the red. When losses start to grow, the emotions will distort our perspective on reality.

Cortisol is released by the brain this is a stress hormone that interferes with thought, memory
and rational decision making. This process is very subtle and happens below the level of
conscious awareness.

Humans are biologically motivated to try to avoid losses so it isnt surprising this is especially
testing on our psyche. The path of least resistance is to cut the pain as quickly as possible,
regardless of what happens next.

Rather than trying to deal with the aftermath, it is better to avoid getting into this situation in the
first place. While nobody can avoid losses altogether, we can control the size of those losses. Or
more precisely, the size of those losses relative to our emotional comfort zone.

Being too emotionally invested in every transaction on your account doesnt bode well for long
term success or your health for that matter.

Anyone who finds themselves stressed out or losing sleep over fluctuations in their account is
probably over-exposed to the market. They have too much at stake relative to their wealth.

Challenge 2: Dont lose sight of the endgame

One of the biggest myths about trading is that somehow those who are successful must have an
intuitive flair for second-guessing markets and that this is impossible for others to replicate.
This assumption is wrong. Traders who make money consistently are not achieving success by
one, two or three winning trades. Or even a month of winning trades. They win because they
have a tried and tested system in place.

Over time that system is able to create a positive return for every dollar it uses as working equity.
For example, it might only be a return of 1 cent per dollar per month. It doesnt really matter.
Whats important is that it has a positive return on equity over time.

The difference between the pro and the amateur is that the pro looks for a long term return on
capital invested, whereas the amateur treats each trade individually as a punt.

Challenge 3: The temptation to take money off the table

Theres always an urge to grab profits while theyre there. After all the market could turn and
those greens could quickly turn red.
Human beings are naturally biased towards loss aversion. Experiments have proven that given a
reward or loss of equal size, we feel the pain of the loss as being greater than the joy of the
reward. This is not an emotion thats easily shrugged-off either. It is so ingrained in all of us that
it has been traced back to primates.

Be cognizant of loss aversion and try to resist the urge to take money off the table as soon as its
there. Cutting winnings too early can sabotage a strategy and prevent it from ever realizing its
potential.

Challenge 4: Coping with traders regret

How many times have you heard a colleague or friend say something like this? I could have
invested all of my money in Microsoft shares when they were 10 cents, and sold them at 100
dollars.

Traders regret is that emotion felt when you could have bought but didnt. Its an acute
emotional pain felt as a fear of missing out (FOMO) mixed with the remorse or anger of not
acting on an early hunch.

The regretful trader usually sits back, brooding and fuming that the market is moving without
them, and often telling everyone about it.

This emotion is extremely destructive to the individual it affects and does influence rational
thought. Its an emotion so powerful it can drive markets to unsustainable levels and has been
responsible for creating enormous asset bubbles.

But its also just that; an emotion and not reality.

Traders regret emphasizes the winning outcomes. These are situations where we could have
made a lot of money but didnt. However we tend to ignore other situations where we could have
made wrong decisions that would have resulted in losses.

With hindsight, its easy to look back and think that we had all of the facts at-hand that we know
now. But this just isnt the case. There was probably a good reason why we didnt do that trade in
the first place.

For every Microsoft there were literally thousands of other IPOs that went to the wall after just a
short time. Many investors lost a fortune backing these failures.

Accept that nobody can see into the future however much theyd like to. We make decisions
based on the facts at hand, and in the present.

Challenge 5: Accept that you cannot control the market

One of the best lessons to learn early on is that you cannot control the market. Successful money
managers do not spend their time watching every price tick on a computer screen. It isnt
productive to them because it is not something they can influence.

Moreover micro-analyzing the market has other negative behavior consequences. By watching
every tick your emotional mood will swing according to whether the market is going for or
against you.

As well as being highly stressful which in itself is bad, this emotional rollercoaster will often
develop into clouded judgement.

Market watching can cause a trader to make rash decisions such as closing a position too early if
the price is going against them. It can trigger panic/fear responses such as capitulating out as the
market bottoms (or tops).

When crowd fear is reaching a peak this is typically the worst time to exit and when losses will
be greatest.

On the other side, being glued to the screen all day can lead to over optimism when things are
going well. This routinely leads to taking on too much risk when the market is being kind to us.

Instead, use time to research the factors that influence markets rather than relying on intuitions
and guesswork. Or analyze your trading plan and see how it can be improved.

Even so accept that you can do all of the analysis in the world, and do everything possible but
sometimes the market just wont go in the direction you expect it to. Accept that there are always
circumstances that cannot be foreseen.