In trading, it is not enough to have a working trading strategy. You also need to have the confidence and perseverance that will help you stick to your trading strategy even in the most difficult of times. This is easier said than done. However, it is extremely important to have a psychological advantage and the ability to control your emotions in trading.
Let's say you just had your seventh losing trade in a row. All your efforts to trade in plus lead to nothing, and the size of your deposit gradually decreases. Lately you've been on a losing streak and you don't know when it will end. You already doubt your trading strategy and want to try trading in a completely different way. You start to worry and worry. All these moments are experienced by every trader.
As a rule, most traders trade alone. There is no one next to them who could support them, reassure them or give practical advice. Therefore, it is important to learn how to deal with emotions on your own. In today's article, I will give you simple tips and tricks to help you avoid these conditions in your trading.
Negative emotions in trading
When we risk our money, we tend to be emotional when we trade. As a rule, any perceived loss leads to a feeling of anxiety, and sometimes becomes a cause for panic for some traders.
It is imperative that you always minimize the negative consequences that can result from negative emotions. Here are some examples of the most common negative emotions that traders experience:
Disappointment. You feel dissatisfied with yourself or your trading system because of a bad trade or lack of confidence in your strategy.
Depression. As you go through a series of losing trades and encounter unexpected drawdowns, you constantly judge yourself and may even become depressed.
Panic. You may have opened a much larger position than usual. You may have neglected to use a stop loss and now the price is moving against you and you start to panic.
Despair. You may have sold at a support level, but the price has skyrocketed from that level and now you are taking a big loss. You are hoping that the price will return to the breakeven level and you will be able to exit without losses.
Greed. You are in a winning trade, but everything on the chart is telling you to exit the trade and lock in your profits. But deep down you want to get the most out of this deal. Subsequently, because of your greed, you even find yourself at a loss.
Positive emotions in trading
It is imperative that we not only try to neutralize negative emotions during our trading, but we must also strive to develop positive emotions that will help us build a winning mindset. Here are some positive emotions you can work on:
Think positive. Every action starts with a thought. Think positive and you will attract positive energy. You must believe in yourself and in this principle in order to build a positive trading psychology. Remember, the glass is always half full, not half empty.
Be patient. Good things come to those who wait for them. This is especially true in trading. Do not chase the number of transactions. Instead, learn to sit back and let the market come to you. And if you miss a deal, so be it, but you'll be satisfied knowing you did the right thing. And in the end it will pay off.
Be grateful. Whether you win or lose a trade, be thankful for the trading opportunities that the market provides you on a daily basis.
Believe in yourself. Undoubtedly, trading is one of the most difficult professions, but there is light at the end of the tunnel. Stay in the market, no matter how long it takes. Keep believing in yourself to be a consistently profitable trader.
Love trading. If you love what you do, you will never work a day in your life. Be passionate about the market. You should not be interested only in profit. Love trading and financial markets.
Be persistent. Losses are natural. It happens to all traders and it will happen to you. Loss is nothing but the cost of doing business. You either win in trading or learn a valuable lesson. It takes a minimum of 10,000 hours to master any craft. And trading is no exception.
Visualize. You must visualize your trading day, present profitable trading setups and your trades. You go through every stage of trading in your mind and feel as confident as possible.
The picture as a whole
One of the most difficult and important things for a trader is to understand the effectiveness of their trading system without being tied to specific transactions.
For example, over the past three weeks, you have made seven losing trades. However, if you look at the big picture and take a whole year of your trading as a comparison, then the number of losing trades in the last three weeks is not so significant. Trading is a marathon, not a sprint. What is seven losing trades compared to all the trades you can make in a year?
It can be difficult for many traders to realize that, over a longer period of time, their bad trading streak can have minimal effect. Professional traders who have made thousands of trades understand that one should not succumb to negative emotions due to a period of unsuccessful trading. Even after making ten losing trades in a row, an experienced trader will not get upset because of this.
Therefore, to begin with, it is very important for you to learn to see the whole picture as a whole and not be attached to individual results. Look at your losing streak in the context of your entire trading. More often than not, the overall situation will not be as bad as you might imagine.
The best preparation
One of the best ways to reduce the anxiety and stress associated with trading is to become better prepared. This means that you must do your research and be prepared before the market opens.
This includes tasks such as plotting key support and resistance levels on charts, checking all planned news events, and analyzing possible trade setups. As long as the market is open, you should focus primarily on execution rather than market research.
Proper preparation is a key factor that is often underestimated by many traders.
Trading psychology
Think about how emotionally you would be if you had a losing streak over the past three weeks. Your mood will be depressed.
It is always very difficult for a novice trader to switch from a demo account to a real account, because there are many additional factors that affect his emotional state.
If you do not manage your trading psychology , it will be difficult for you to remain confident in your trading and not give in to negative emotions. Therefore, you should always strive to remain calm and objective in your trading. This is much more difficult than it seems, and often because of the first failures and inability to control themselves, most novice traders leave the market.
Negative emotions accumulate and affect your thinking in a negative way. They can ruin your trading success, so be careful and never forget trading psychology. Controlling your emotions is hard work, but that is the key to success.
Trading Plan
A trading plan will help you better focus on your trading and discipline yourself. A good trading plan helps reduce the negative emotions associated with trading as it acts as a guide to action for both foreseen and unforeseen events.
What are the questions that need to be answered as part of your trading plan?
- What markets do you plan to trade?
- How will you determine your risk on each trade?
- How will you determine the size of your position?
- What is the maximum drawdown allowed for you?
- What criteria will you use to enter and exit a trade?
- What trading timeframe will you focus on?
- What is the maximum leverage you plan to use?
- How long do you plan to stay in the trade?
- How much money will you deposit into your account?
- How will you trade the correlation of currency pairs ?
- What will you do in case of a black swan?
My guess is that less than 5% of traders take the time to put together a serious trading plan. But experienced traders know that this is an integral part of success in the market.
Discipline
Discipline directly affects your psychological state. If your trading system is too inconsistent, your trading results will be random. And this will lead to more mistakes and, as a result, negative emotions.
Discipline allows you to remain calm and confident in your trading. Keeping a trading journal, waiting for the right signal that meets all the criteria, calculating your risks and not deviating from your strategy - all this will allow you to create the basis for stable and confident trading.
Unexpected news events or large losses often evoke negative emotions. But if you are disciplined enough in your trading, you should always be prepared for the unexpected.
Use dynamic risk management and adjust your risks in order to minimize losses during the period of unprofitable trading. If used effectively, this method will help you deal with drawdowns effectively and improve your results.
Remember that all traders tend to experience negative emotions. You will have to learn how to cope with this psychological state. Being disciplined is a constant work that will allow you to avoid negative emotions. Self-control is one of the most important factors for success in trading.
Stick to your trading strategy
Many novice forex traders are like nomads. They are just sorting through different trading strategies. One week they trade on the basis of support and resistance, the next week they use Elliott waves, the next they use harmonic patterns . Lack of discipline and focus is not only counterproductive, but also leads to unnecessary emotional ups and downs.
You need to fully immerse yourself and learn a technique that is comfortable for you and that suits your personality. Once you have found your trading strategy, you need to learn it as much as possible and use it consistently.
To correctly evaluate your strategy, you will need at least 100 trades. Many beginner traders search the market for some sort of lossless holy grail system that doesn't exist. This leads them down a road of unrealistic expectations and constant disappointment.
Successful traders find a strategy and stick to it. They know that their strategy will have losses, sometimes even a series of losses. But, in the end, their strategy has a certain advantage, the implementation of which is only a matter of time.
trading journal
The trading journal is the source of your trading statistics. The purpose of a trading journal is to give you the opportunity to evaluate your trading performance and make the necessary adjustments.
Keeping a trading journal is an important part of controlling your emotions. You can always evaluate the success of your trading and think about what can be improved.
It is extremely important not to focus only on losing trades. When analyzing your results, you should always see the overall context of your trading. This will help you avoid making past mistakes and give you an incentive to keep improving in your trading.
Unfortunately, most traders do not keep a trading journal . Don't make this mistake.
How to deal with emotions in trading?
You notice a great trading opportunity in the GBP/USD currency pair. See the economic calendar to check if there are important news coming out. You analyze all the parameters of the transaction once again and remind yourself of the rules of money management. Finally, you open short.
You aim for 70 pips and almost immediately your position becomes profitable.
- +15 points. You feel the little excitement you always get when you're on a winning trade.
- +25 points. Your excitement is growing.
- +40 points. “I’m halfway there,” you tell yourself.
- +60 points. “Only 10 points left!” Now you feel practically happy, as your transaction is already almost successfully completed.
- +20 points. "What? Noooo, why did the price change direction?
Sounds familiar? Most traders experience similar emotions. At this point, it is easy to get nervous and close the position with minimal profit or loss. Then, when the price does get to your target, you feel sad and frustrated because you couldn't sit through the trade and liquidated it prematurely.
This is a very common mistake, the cause of which is fear and nervousness. As a beginner trader, it is very easy to get emotional in your trading. Most often, beginners do not have the patience to sit out a trade to take profit, and they close it much earlier.
Therefore, you need to have a clear plan to help you deal with your trading emotions.
Step away from charts
One of the main reasons for getting emotional in trading is constantly counting your profit or loss. However, you should not constantly watch every movement of the market. You will be happy when the price moves in the direction you have chosen, you will be worried as soon as the direction of the price changes.
Therefore, it is best to move away from the charts after opening a trade. You can set additional signals in your terminal 5-10 pips before your stop loss or take profit. Do something else during this time. This will allow you to avoid anxiety and consistently achieve your trading goals without any stress.
Over time, you will gain more confidence in your trading strategy as you can consistently close your trades in the black.
Avoid overtrading
Beginning traders, as a rule, have a desire to constantly open transactions. They think, "A trader's job is trading, so I have to trade all the time." But this is a delusion.
Try asking yourself the following four questions before taking any position:
- Have I analyzed this trade well enough?
- Is there good reason to believe that this deal will be successful?
- Is this trade in line with my trading strategy?
- Where will my stop loss and take profit be placed?
You must be prepared to confidently answer each of these questions. This will give you the opportunity to open only system trades and not enter the market by accident.
Study each currency pair
Study each currency pair to get an idea of how the price might behave. For example, when you enter a GBP/JPY trade, you can expect a bumpy move: down 20 pips, up 10 pips, down 30 pips and back 40 pips. If you enter a EUR/USD trade, you expect the price to move slowly in a certain direction. Also pay close attention to the nearest support and resistance levels.
Knowing each currency pair will remove most of the fears you may have experienced while trading. If you're prepared for the GBP/JPY to make a 40 pip profit and then reverse 20 pip on a whim, you won't be surprised or excited when that happens.
Try to start with one currency pair. Study it in detail, and only then add another pair, and then another.
Beware of positive emotions
Emotions and trading are like water and oil - they cannot mix. Discipline is the key to success in trading, and you can't stay disciplined if you're influenced by emotions.
But how useful are positive emotions? For example, you feel joy after a profitable trade or feel satisfied with yourself after a profitable month. I would say that positive emotions and overly high spirits are also harmful and dangerous for a trader.
Stop in time
In trading, streaks of profitable trades are often replaced by streaks of losses. Obviously winning streaks are good, however at these times we tend to feel overconfident which often gets in the way of your trading.
It's a good idea to take a break after three, four or five winning trades in a row and just remind yourself that even if you're on a winning streak, it's still important to stick to your trading plan and manage your risk.
Losses can be emotionally draining. After three, four, five or more losing trades, we begin to doubt our abilities and our strategy. This can lead to fear of execution or, even worse, we can start to ignore our trading plan.
Stop looking at profit or loss
Traders are human beings first and foremost, and as human beings we tend to become attached to our money. And it hurts us to lose them. There have been several experiments that have shown that we are more likely to avoid losses than to realize profits.
Many traders tend to check their profit and loss very often. Often this is due to our inherent fear of loss. So you begin to make decisions based not on information received from the market, but rather on what your current profit or loss is.
Obviously, this type of obsession is not only counterproductive, but can also be detrimental to the trader. One way to solve this problem is to use the Set it and forget it approach . That is, you place a stop loss and take profit at the moment you enter the trade, and then just forget about it.
Realistic trading expectations
Thousands of new traders flock to the financial markets every day because they have heard or seen someone who has made huge profits through trading. But as a beginner, you must remain realistic and have realistic expectations.
Just because someone else was able to make 100% or even 200% returns in a relatively short amount of time doesn't mean you can achieve the same results. In fact, this does not mean that the same trader can repeat these results again. You must treat trading like a business and always have realistic expectations.
The financial markets are not the place for those looking for a get-rich-quick scheme. This is a place where you always need to think about risks.
If you expect to be a millionaire in 6 months with $5,000 starting capital, you will be disappointed. For some reason, many beginners believe that this is not only possible, but quite achievable, but in reality it is just their fantasy.
Know When to Stop Your Trading
Successful traders know that it is important not to trade at certain times.
Important events in your life. If you are going through some kind of event that changes your personal life, such as a wedding, the birth of a child on the road, or anything else that can cause additional stress, it would be a good idea to take a break from trading and return to the market only after your mind fully focused on trading.
News events. Certain types of economic news can cause unusually high volatility in the market. Examples include the day of the NFP report, the announcement of the Central Bank's rate, and speeches by senior government officials.
Bank and national holidays. When bank or national holidays come in a large country, liquidity begins to shrink. On this day, most of the big players are out of the market, so any price movements are usually short-lived.
Uncertain geopolitical events. When there is uncertainty about political elections or voting in an important referendum such as Brexit, it is best to stay out of the market.
Newton's third law
Newton's third law states that an action force is opposite in direction to a reaction force. An example is a fish swimming in water. Newton's third law states that the force applied to push the water backwards is equal and opposite to the force applied to push the fish forward.
Although Newton developed these laws to study physics, they also apply to other areas of life. For example, to the relation between positive and negative emotions.
As traders, we know how destructive strong emotions can be. The real danger lies in the profitable trades and high spirits. Just as over-confidence can easily lead to losses, over-celebrating a victory can create an imbalance that will eventually provoke an equal and opposite emotional response. The more you enjoy your profits, the more you will be disappointed in yourself after a series of losses.
Find your balance
Although positive or negative emotions can prevent you from seeing the market in a neutral way, this does not mean that you should get rid of all emotions.
In other words, don't try to suppress every emotion that springs up inside you. Attempts to do this can do more harm than good, because sooner or later repressed emotions will break out.
For comparison, take the wings of an airplane. They are not exactly rigid, because if they were, they would break at the first sign of turbulence. Instead, they flex to some extent, and this makes them stronger and more stable. The same goes for bridges and tall buildings. The tallest buildings in the world sway from side to side on a windy day. This is no coincidence. This helps buildings not tip over during heavy storms.
So instead of trying to contain all emotions while trading, give them some freedom. Just be sure to find and maintain the right balance.
Let's say you wait for the perfect trade setup. The price immediately went in your direction, and you are already celebrating the victory. However, the next day you open a trading terminal and find to your horror that the market has gone against your position and you are now in a deep drawdown. Are you familiar with this situation? Surely a positive emotional state after a visible profit will cause you to have an equal negative reaction to a losing position.
Try to always control your positive emotions. This will help you stay neutral and disciplined.
Remember that to be successful in trading, you don't need to prevent negative thoughts and feelings, but control them. And like everything else in trading, it's not about finding the best emotional balance, it's about finding the emotional balance that works best for you.