Similar to working a full-time job and making decisions that are affected by emotions, trading involves very much the same thing. Emotions are part of nearly every decision we make, especially when they involve our livelihood and paychecks.
Controlling your emotions is a powerful tool to have in your arsenal and one that any trader should work on mastering to the best of abilities. Keeping your emotions in check could help you with decision-making and consistency.
There are 3 main emotions to keep in mind:
Fear
Having a trading position in the market and being scared is a sign that you are doing something wrong. You could be trading a size that is too big in relation to your risk tolerance. This could lead to unnecessary losses and ones that could destroy your psychology and make you lose hope.
Another reason for fear while trading includes trading for no reason which means you are lacking conviction towards a specific trade. In this case, whether you are right or wrong, it will feel like luck more than anything else and in turn, make you nervous and unsure.
Excitement
It’s important to have conviction and to be confident and excited about a trade. The right amount of it should be in line with your trading strategy and means you feel good about the trade and the outcome of it will not affect your psychology whether it’s positive or negative. Too much of it turns into greediness and could set you back if things do not work out properly.
Greed
We have all experienced greed and it’s almost never a good emotion as it leads to negative outcomes. You could get greedy after a streak of winners where you expect that it will continue. Other forms of greed include only thinking of potentially very big winners and neglecting other opportunities as well as not settling for your initial target and letting the trade run, a potentially disastrous action that could see the market turn on you.
Remember that slow and steady wins the race for the most part and you should always be at peace whether you had a profitable day or not. This helps you carry on and trade another day.
There’s no right or wrong when it comes to controlling your emotions. Work on establishing your own personal risk guidelines such as capital invested, risk per trade, and other factors that will eventually merge with your trading strategy. Avoid during volatile conditions or before the release of market-moving news. Last but not least, relax and remember that trading requires patience and should be treated like any other business. Most businesses, for the most part, will not make you rich overnight and the same goes for trading the financial markets.
With CFI, you can trade thousands of CFDs on Stocks, Forex, Commodities, Indices, and ETFs from one single platform. If you are new to the financial markets, you can start with a risk-free demo account and for the more seasoned traders, opening a real account is a straightforward process that requires very little time. CFI offers its clients many services and features including free daily webinars, dedicated account managers, daily technical reports, and highly competitive conditions that include fast execution and spreads from zero pips.
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The content present in this article reflects the opinions and views of the author and does not necessarily reflect the position of CFI. The material published on this blog is provided for informational purposes only and should not be considered as investment advice. The Company is not responsible for the decisions and choices of the investor who has full and free will to make decisions that they see appropriate upon the investor’s sole discretion.