The most common emotions traders experience and how to prepare for them
We continue our look at the main emotions that influence traders. Last week we discussed elation, surprise and anger and today we continue with some of the more negative influences on the behaviour of people in the markets and some ways to limit them, or even turn them around.
Fear is one of the most basic emotions and plays a huge part in markets and trading. Being primal in its character it’s quite hard to predict when it will rear its head, but you can look for signs that it’s affecting your decision making process.
Hesitation, self-doubt and a mood that crosses between bad and slightly depressed are indicators of fear creeping in. It can happen suddenly, or it can build up. The second is more likely in a mental activity such as trading, but the first one should also be noted and acted upon.
Fear isn’t something that has to be shut out. In trading it’s not bravery that will save the day, but knowledge and confidence. Fear can be the path to the latter, as it’s an internal signal that something is wrong, something is missing and should be addressed. Moving away from trading is advised in these situations, best followed by simple, directed questions – “Why am I reluctant to make this trade?”, “Are these the best conditions to enter the trade? If they were before why aren’t they now?”, “Am I afraid of losing in general, or is there a specific reason causing it at the moment?”
First and foremost the existence of greed in all traders shouldn’t be denied. Instead it has to be understood and given a positive spin. If it isn’t understood it lives up to its name, but given the correct direction, it can be a driving force to one of the holy grails of trading – letting your profits run.
People have different definitions of greed and for traders it is quite similar to overtrading. Overtrading has two aspects – trading at times when it would have been better to sit on the sidelines and placing trades with amounts that are unreasonably high.
Both of these can be curtailed with planning. You can address overtrading before even the process of trading begins by defining the parameters of what and when you’ll be trading – for example EUR/USD after an important speech from the ECB but not for more than 2 hours, as the volatility will die down, limiting your chances of profits.
Money management is the answer to the second aspect of overtrading. It sounds quite simple really – don’t trade with amounts that are too large compared to your account and don’t increase the amounts of your trades during your current trading session, regardless of losses and wins.
The ego is a driving force for all of us in our everyday social and mental lives. It’s described by psychologists as the meeting point between what we really want and what our rational mind tells us that we should want (to put it in one sentence). Just like greed, it has two aspects for trading.
It can be seen as part of the motivation for getting into trading itself, apart from the pure financial gain that is the ultimate target. But it can be the driving force to quickly depleting your account once it gets in the way of understanding and predicting the market.
The thoughts that signal its negative effect usually come when a series of losses occurs. Often they are similar to “I’m better than this, I’ve done everything right and the market is behaving irrationally”, “I’m not losing because of me, this is just stupid”.
These moments have to signal a shift in how you think about the situation. You have to remove yourself from its center and place the cold-hard facts of the market first and try to see what’s missing – it could be some piece of news, some indicators’ level or maybe tracking back to a mistake you made – a factor that has lead to losses, not some sort of personal trait. It’s you that has an ego, not the market.
Stay tuned for more articles on the psychological side of trading and how you can improve it.