What is emotional trading?
Emotional trading is when a trader or investor lets personal feelings and emotions impact their decision-making. Sometimes it can be helpful, but usually bringing emotion into trading is a bad idea. It is therefore important to take emotions out of trading and this can be achieved through the following 7 points.
1. Trade Quality
Entering into mediocre trades will yield mediocre results. If you only trade the best opportunities you will trade less but you will have greater success. This will put you on the road to fearless trading and help you to simplify the trading approach. Write down your rules! Do nothing unless every rule is not satisfied. When you consider taking a trade, look for good reasons to do so. If you can’t find a good reason then avoid it.
2. Buy or Sell with Confidence
The rules that you trade with have to have a foundation of success. You have to believe in your rules or you won’t believe in holding the trade through the shakeout periods in the longer trend. Analyze and practice the strategy until you have proven to yourself that it works. Then trade it slowly without a lot of risk so you can gain a greater level of confidence that it works.
3. Don’t Watch the Scoreboard
Athletes don’t spend a lot of time watching the scoreboard during a game, it only matters when the game is over. In trading, the scoreboard is the profit and loss figure for your account. If you focus on the scoreboard it is likely that you will lose sight of what is happening in the game. As a technical trader, all that matters to me is what the chart is telling me.
4. Plan the Trades
I find it helpful to predict the major moves of the chart. You must understand that the market cannot move straight and that there must be some pullbacks to accumulate more traders and shake out weak holders. Emotions can induce fear when those pull backs happen. If you plan the trade you can keep emotions out and cannot succumb to fear when the pull backs happen.
5. Plan for Possible Losses
Before you enter a trade, figure out what needs to happen for you to consider the trade a loser. It can be when there are signs of reversals against your predicted directions or when a support or resistance is broken. Understanding where that point to get out is requires some experience and knowledge but once you know how to identify where it is on the chart, plan for possible losses.
6. Don’t get over excited with one trade
There are times when you can get overexcited by spotting a very good entry. You should never get too excited with one trade. You should always protect the trade with Stop Loss and follow the rules. Act in your own best interest.
7. Tolerate Risk
Without risk, there is no potential for return. To avoid trading with fear we have to be comfortable with the risk. If not, we will let fear guide our decisions and those decisions will probably be wrong. Therefore, do not take more risk on a trade than you are comfortable losing. Plan your trades based on how much you are willing to lose and how much you are targeting and let that determine the size of your positions.