How to manage your emotions when trading

Constant movement and action make it easy to get caught up in sudden price action that takes place in the forex market.

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Compared to stock trading – where there are endless days where basically nothing happens – the forex market provides the opportunity to increase (or – cringe – decrease) your trading account 5, 10, or even 20 percent in the space of a few hours. That’s a reasonable enough reason for your emotions to go a little (or a lot!) crazy.

The point, here, is that it’s very easy to get caught up in the excitement of trading. However, the best traders understand this and have plans in place to avoid it, to keep a clear head, and to navigate the market analytically without being influenced by good or bad emotions.

With advice and tips compiled from some of the best resources and most knowledgeable traders, you too can learn the ins and outs of controlling your emotions, eliminating them from affecting your trading, and maintaining balance and success throughout your trading day.

You Can’t Just Talk The Talk

Being knowledgeable about trading is important, to be sure, however, it can’t be confused with performance.

If you talk a mean trading talk but consistently or regularly fail when it comes to performance, something is off.

The trouble is this: as a trader, you generally feel great when you’re able to skillfully and knowledgeably hold a conversation about trading. The brain perceives this good feeling as something real. With this line of reasoning, the more knowledgeable you are, the better you are at executing trades.

Again, while you may want to believe this is a fact, it’s not – it’s a trap that many traders often fall into. Trading accounts separate this fictional line of thinking from the reality of effective trading, regardless of how good you feel about what you know.

This disconnect has a name: Cognitive Dissonance.

Your brain wants to hold onto feelings and beliefs, regardless of whether they’re supported by fact or not. Your brain wants to maintain the illusion of control over the market. In this way, your brain tends to hijack your emotional and mental state before you even start your trading day.

You need to shake off this mental and emotional rut. There is no simple way to do it outside of rigorously working on your trading game, improving your outcomes and strategies, and mirroring the success you feel before you trade with the success you earn once you’re actually trading.

Staying Calm Is Key

Remaining calm, cool, and collected, both during times of concern and pressure as well as during times of immense success, is something that successful traders have mastered. Many traders aspire to the profession because they picture a life that is filled, every day, with tons of excitement.

Trading is, of course, often a flurry of excitement and change, but if you want to be a good and successful trader, constantly feeling that rush of adrenaline is a no-no. Successful traders have learned to fight off the typical rush of excitement that many traders fall victim to. That’s because they understand that if they bring their emotions to their trading space, bad things are likely to follow.

Being a slave to your emotions leads to making snap judgments and ill-advised trading decisions that are not likely to end well. This is because the decisions are usually motivated by one of two things: greed or fear.

Decisions motivated by greed typically move a trader to stay in a position far longer than is reasonable and far past the point when the trader should have jumped ship.

In the end, these types of trading choices turn small losses in too much larger losses, losses that could have ultimately been avoided.

Trading decisions motivated by fear usually lead to the opposite result:

Traders, crippled by the fear of losing or having taken the wrong position, tap out of trades before they have a chance to develop. This often leads to the trader bringing in minimal profits whereas if they’d stayed the course, they could have made a handsome profit.

Winning traders look like Clint Eastwood as “Dirty Harry”– coolly analyzing the market, rationally-not-passionately, and then calmly and quietly executing a trading strategy.

If they suffer a small loss, it’s no big deal. It doesn’t bother them to the point where they spend the next hour obsessing over what they did wrong. When a trade is a winner, they don’t jump for joy – because they’re not surprised. They expect to win.

Read And Learn About The Psychology Of Trading

Research and education is an important part of any trader’s life. This is especially true when it comes to managing your emotions. There are a number of great resources that can help you learn how to master your emotions in forex trading.

In Mark Douglas’ Trading in the Zone, you can learn about some of the underlying reasons that traders suffer from inconsistency when trading. This book also covers ways to help you overcome some of the ingrained habits you’ve developed that are costing you money.

Douglas also reveals some market myths one by one and teaches you how to see past random outcomes and to understand the reality of risks, and how to become comfortable with governing market probabilities that can and will affect how the market moves.

Another of Douglas’ works, The Disciplined Trader, is known today as an industry classic.

When it was first published in 1990, it was considered a ground-breaking text as one of the first books written that addresses the psychological nature of trading and how winning traders think.

This book is detailed in its examination of the reasons why traders fail to raise and maintain high levels of equity on a consistent basis.

It also offers you interesting, original, and practical methods to addressing limiting mindsets that affect your success. Douglas is skilled at breaking down the questions and emotions that hinder you and offers conclusive ways to work through them.

Other well-known authors and traders who have written books addressing the subject of the psychology of trading include Dr. Alexander Elder and Brett Steenbarger.

You Can’t Avoid Discomfort

It’s easy to become hijacked by your emotions when trading, especially when you’ve experienced a large loss or several losses in a row.

Inexperienced traders seem to fall victim to this fairly often. Some traders will just attempt to blindly bull their way through, trading while still fighting through the pain, anger, and disappointment.

In the end, this is a quick way to create even more chaos and trouble. Other traders become withdrawn, seeking to avoid any more losses at any cost, pushing it out of their mind so they aren’t forced to think about it. Ultimately, neither one of these strategies work well, and both are often more destructive than anything else.

The point is this: trading involves risk and risk involves some level of discomfort, even for the most experienced, confident, and successful traders.

If you seek to avoid discomfort, sweep it under the rug, or use it as motivation to seek revenge on the market, you’re not managing your emotions in a way that will allow you to navigate risks and trade successfully.

The key is learning to accept some discomfort in trading without allowing that discomfort to lead to an emotional state that negatively affects your trading.

The Bottom Line

Emotions in trading are unavoidable but can be managed successfully.

You need to have a strong trading strategy in place. With a solid trading strategy, you can trade with cool confidence and without your emotions negatively affecting your trading. Additionally, you need to understand the importance of your psychological state and how it can affect your trading.

Aim to master your emotions as part of your overall goal of mastering forex trading.