The ability to manage one’s emotions during trading might be the difference between success and failure. Keeping a level head is crucial for continuous trading since your mental state significantly influences your choices, especially if you’re new to trading. In this article, we examine the significance of day trading psychology for new and seasoned traders and provide some advice on how to trade emotionally free.
THE IMPORTANCE OF EMOTIONAL CONTROL WHILE TRADING
It is impossible to overestimate the value of emotional control in day trading.
Imagine you’ve just entered a trade ahead of Non-Farm Payrolls (NFP) with the hope that if the figure is more excellent than expected, the price of EUR/USD will spike immediately, allowing you to earn a substantial short-term profit.
The NFP is out; as you had anticipated, the results surpass expectations. But for some reason, the cost decreases!
The more you reflect on your research and why the EUR/USD should rise, the more the price declines.
The “Fight or Flight” instinct kicks in when you start to watch the red accumulate on your losing position. This tendency may often get in the way of our aims, which can be particularly troublesome for traders since it can cause impulsive behaviors.
Professional traders aim to avoid having a single impulsive choice wreck their whole career rather than taking the possibility that it would hurt their account. Learning how to reduce your trading emotions might take a lot of work and many deals.
THE 3 MOST COMMON EMOTIONS EXPERIENCED BY TRADERS
The most frequent feelings that traders go through are fear, anxiety, conviction, enthusiasm, greed, and overconfidence.
Trading too large is a frequent source of concern. Trading at the wrong size needlessly increases volatility and makes you make errors you wouldn’t make if you weren’t under the pressure of potentially suffering more losses than usual.
You are in the “wrong” trade, one that doesn’t suit your trading strategy, which is another reason for your dread (or anxiety).
The two primary emotions you’ll want to feed off are conviction and exhilaration, and you should experience these feelings in every deal you make. Conviction is the icing on the cake of each successful transaction. Therefore chances are excellent that you aren’t in the “perfect” deal for you if you lack either of these emotions.
By “right,” we mean the transaction that complies with your trading strategy. Both profitable and unsuccessful transactions have the potential to be losers. To keep yourself earning and losing on just profitable investments is the goal. This may be ensured by ensuring you are confident in a specific deal.
You can grow greedy if you start only to want to make transactions that you believe have a high likelihood of success. Although your greed may have resulted from your success, you might fall and experience a downturn if you aren’t cautious.
Always ensure your trade mechanics are sound, including keeping to stops, targets, adequate risk/management, and sound trade setups. Overconfident traders who make poor decisions might halt a successful streak.
TOP TIPS AND STRATEGIES FOR CONTROLLING EMOTIONS WHILE TRADING
Planning your strategy is essential if you want to keep negative emotions out of your trade. The proverb “Failing to prepare is preparing to fail” might be accurate in financial markets.
There are several ways to succeed as a trader. Several ways and tactics might assist traders in achieving their objectives. But rather than being based on “hunches,” whatever will work for that individual will often be a defined and methodical strategy.
The following five strategies can help you feel more in control of your emotions when trading.
- Make Personal Rules
You may better manage your emotions by creating your own rules for trading. Setting profit objectives and stopping losses, as well as risk/reward tolerance criteria for entering and leaving trades, may be part of your trading rules.
- Trade in the Right Market Conditions
Keeping away from less-than-ideal market situations is also wise. It’s a good idea to avoid trading when you’re not “feeling” it. Don’t depend on the market to make you feel better; if trading isn’t for you, the best action could be to stop doing it.
- Reduce the Trade Size
Reduce your transaction size for one of the most straightforward strategies to lessen the emotional impact of your trades.
Here is one instance. Consider a trader who deposits $10,000 to start an account. First, our trader buys a $10,000 lot of the EUR/USD currency pair.
The trader notices modest swings in the account as the transaction progresses at $1 per pip. Our trader saw their useable margin of $9,680 vary by $1 for each pip as they put up $320 in the margin.
Imagine that the same trader now makes a $300,000 transaction in the same currency pair.
The transaction is now going for $30 per pip since our trader must put up $9,600 for margin, leaving them with only $400 in the available margin.
The useable margin is depleted if the trade goes against our trader by merely 14 pips, and the deal is promptly canceled as a margin call.
The trader is compelled to accept a loss since there is no likelihood that the price will turn around and move the deal into the black.
In this instance, the novice trader just placed himself in a situation where the chances of success were simply not favorable. Leverage reduction may significantly reduce the likelihood of such occurrences in the future.
- Create a Trading Plan and a Trading Journal
Planning for several outcomes in the lead-up to major news events may also be a tactic to keep in mind regarding underlying variables.
The difference in performance between novice traders who use a trading strategy and those who don’t may be significant. The first step in combating trading emotions is to put together a trading strategy, but regrettably, this will not mitigate the consequences of these emotions. Keeping a diary for your forex trading might be beneficial.
You’ll be more able to react logically to changes in the market if you’re at ease and like your trading.