With thanks to Trotsky, Matt M. & various other members of the ChartBulls community
What is meant by Emotion in Trading?
A trader will typically experience emotion numerous times throughout trading, and the above are all a derivative of emotion. Emotion is one of the single largest downfalls of one’s portfolio, efficiency, profitability and enjoyment throughout their time trading, yet there is a lack of material that covers emotional trading and how to negate the ill-effect it has on one’s trading ability.
To trade efficiently and effectively, not only do you need to have sound understanding of the fundamentals of technical and/or fundamental analysis, but one must also proactively make a conscious effort to master control over their own emotions.
Throughout my time participating within the chat medium of the ChartBulls group, I’ve witnessed countless members fall prey to their emotion, only to find their portfolio entirely liquidated, or a large portion of sequential losses crystallised, not so much through incomplete or ill-prepared TA, but more through poor control over emotion.
The following are prevalent when subject to emotion when trading:
- Closing a position too early through fear of not maintaining the profitable position.
- Closing a position in a loss for fear of crystallising more substantial losses by holding.
- Chasing losses by entering a position without sound TA to back up their entry choice.
- Participating in the ‘FOMO’ mentality by market entering a position during a pump without a defined exit strategy.
- Ignoring their own trading strategy entirely and ignoring fundamental risk management rules.
All of us have been subject to at least one of the above when trading, but in order to maintain consistent profits greater than the losses incurred, one must learn to separate emotion from trading.
Anton Kreil maintains a philosophy that one must ‘treat money indifferently and remain impartial toward it’. This is a quote that sticks with me as to truly experience emotion, a trader cannot trade on a paper account or Testnet and simultaneously experience the emotions that are inherent with trading on a real market.
Exposure of one’s true capital to risk brings forth emotion, and that will only be applied in a real market.
Begin Separating Emotion from Trading
Firstly, step away from any trading you’re doing if you’re feeling stressed, worried, angry, upset or elated.
Assess your feelings, recognize them, understand them. Recognizing your feelings is the first step to taking them out of your trading equation. If you feel any of the above, step away, relax, read through your trading diary (I highly recommend creating one if you haven’t already!), or find some study material that you can sink your mind in to, just simply take your mind off of trading.
Once you’re able to maintain self-awareness of your emotions and recognize when they will have an adverse impact on your trading, implement a strategy that works for you to keep them out of your trading.
For me personally, I always endeavor to identify my entry, set my planned exit price and my maximum acceptable loss to place stops where those defined points are.
The below key points should be taken into consideration at all times:
- Always remain vigilant with your own strategy and follow your rules like the bible. No matter how well you think you’re doing, never deviate.
- Always maintain proper risk management and abide by it.
- If you lose on one trade, don’t go into the next with the idea that you will recoup those losses, but take a new entry on its own merit, which leads me on to –
- Always forget about your previous trade, assess a new trade on your TA, and always ensure your TA is well performed.
- Never forego TA because you’re doing well.
- Set a stop and leave it if you struggle with emotionally closing.
These rules are for those who do find it a struggle to identify, separate and deal with emotion when trading. My thoughts are not applicable to everyone and each trader will have their own defined strategy.
If you’d like to talk about trading concepts or any of my above thoughts, join us over at the ChartBulls trading community!
Written by Xivias, ChartBulls Chat Moderator