Emotionless Trading

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Being a successful trader over the long run means that you need to have a winning system that you stick to religiously. The death of many trading accounts and debut-trading careers are caused by the lack of discipline and the interference of emotions.

In this article I’m going to describe the various aspects and effects of emotions on trading and what you can do to develop a way of trading so that your fear or greed poses zero risk to you blowing your account.

Effect of Emotions On Trading

Since we are all human, we are all subject to undergoing an entire range of emotions from extreme fear to excessive greed, depression to euphoria and anything between those ends of the spectrum.

Personally I base my trades on technical analysis and let the price action determine where I will enter a trade and then place my stop at a safe level. However you choose to trade or whatever system you have in place, it needs to be mechanical or automated and not related to your mood for the day.

If you start entering trades because you feel greedy and want to make loads of money or if you start entering trades because you are scared to miss out on the coming move, then you are in for a world of trouble. I have seen other traders do this, they take a position in a market way too early because they missed out on the previous move and they don’t want to miss it again. As the market goes against them they buy bigger and bigger. Finally, when the trade has gone against them so much that they need to reduce their trade size or else risk facing a margin call, they take big losses, only to see the trade move in their favor after they have taken these big losses.

When you enter a trade a place a stop, it can be tempting to move your stop higher as the price gets closer to it. Don’t do it! When you do your analysis and you find an entry point, you choose a safe level to place your stop so that it is a very acceptable loss in case your vision for the direction of the trade was wrong. If you move your stop and add to your losing position to try and get a better average, there is a very good chance that you will lose more in that single trade than in 10 or 20 of your usual trades where you do not move your stop. (And the chances of losing 10 trades in a row are slim if you are a good trader).

Emotional Stability

Another downside to letting your emotions influence your trading decisions is that your mind is never at rest. You are constantly worried about your trade and second-guessing yourself. You may stay glued to your trading screens for hours a day and sacrifice your sleep and health because you cannot get peace of mind while you are trading.

Removing emotions from your trading allows you to have peace of mind and emotional stability. In turn, this peace of mind allows you to make better analysis and to make better trades.

What I mean by removing emotions from your trading is that you have a system. This system indicates certain setups when it is right for you to enter a trade. This system includes a stop loss in case the trade goes against you and it also determines an area to take profit when the trade goes as expected. When you follow this system, the worst thing that can happen is that your stop gets hit and you know what amount you are going to lose. No worrying about disasters or blown accounts, just the trade, following the system you created.

If your trade loses this time then it is no big deal. Your system wins over the long run, so you will win the next trade, or the one after that. I cannot emphasize enough how important it is to have emotional stability and remove your emotions from your trading decisions.

Stick To Your Guns

This brings me to the final reason why you must not let emotions influence your trading decisions: Critique.

There are millions of traders and analysts and even your friends and family who are going to give their opinion, called for or not called for. Nobody is right all the time, and just because someone has had a few good calls in the past does not say anything about their opinion on your current trade.

If you do not have a system that you follow for your trading, or you change the rules of your system constantly, then you are going to run into trouble. You will be tempted to change your trades and stops on the advice or critique of others, and when it turns out that your original analysis was correct you are going to want to hit yourself over the head multiple times.

Trust yourself and your system. Have the confidence and courage to stick to your decisions even when it seems like the whole world thinks in the opposite direction. You have your stops and you limit your losses, so do not let other people tell you what to do.

I have had people tell me that some of my recommendations were totally retarded, only to see those recommendations turn into very profitable trades.

On the flip side, having no emotions is also a benefit to not being bias to a direction. Trade the charts and what you see, not what you think. If you for some reason are really attached to the bullish direction of markets, don’t let that bias cost you money.

These are all things that I have learnt from experience, and while they may sound so simple and obvious, you will be surprised at how many traders do exactly what they are not supposed to do when it comes to discipline and allowing emotions to influence their trading.

Until Next time!
Diggy