Traders new and seasoned deal with many common emotions while trading. These might even linger when they are not trading. The experts differ from the rest by recognizing these emotions and developing methods for dealing with them. Let’s take a look at some common emotions. See if you can recognize them while you are trading.
The Common Trading Emotions
- Fear (of financial failure, can’t support family, etc.) – Fear is a natural response towards the unknown. Your mind is seeking for end-results and trying to see if the scenarios are acceptable. If one of those scenarios is doom to your finance, you should naturally fear trading. But there are ALWAYS unknowns in the market, and factors out of your control, so how can you beat fear?
- Greed – The want of more than should be realistically expected. This usually happens after positive experience with the markets, and is a major factor that breaks down ones discipline in risk management. Greed can also occur after some flat periods when a trader feels that he is mostly right, but hasn’t been placing a large enough position to make it an “exciting” or a “meaningful” gain. Position size increases. Stops aren’t planned out with due diligence, aggressive targets are regarded as if they were conservative targets. All this leads up to breaks down your strategy, and you are left with basically a gambling habit.
- Desperation – You win some you lose some. Many beginning and even seasoned traders fall in the trap of trying to make back what they lost. This is a desperation move to get back to the starting level, or maintain a certain profit-loss ratio. Without carefully planning positions sizing, changes in position out of desperation usually means adding a larger and larger position. What’s worse is that sometimes, this works! But over time, the odds are your desperation moves will harm you more than cover your last few bad trades.
- Euphoria/Pride – Hubris. It is a feeling almost that one is superhuman, or has a special gift. This is usually generated by a string of winners. Winners build confidence, and without any losers to shape character, the trader can develop so much pride that he or she forgoes disciplined steps. What ends up happening is a cycle of a bad trading life where – the winners build confidence – confidence builds bad habits – greed will amplify bad habits eating up the gains – and finally desperation causes an even quicker decline. The fall from great heights to dismal lows are easier than you might think, especially if you are not aware of these emotions.
If you trade long enough you should experience all these emotions. Going through them the first time while trading live can be a roller coaster, I have been there, but it was anything too serious. I want to talk about how to deal with these emotions, but it is time to make dinner and socialize a bit, so I will continue in our next article.
For now try an exercise. Can you recognize the pattern of WHEN these emotions come up? After a gain of 200 pips do you feel Greed? After winning 5 consecutive trades, do you feel Euphoria? What about after 5 consecutive losses? Do you feel desperation? Or fear? It might be helpful to create a journal.
Fan Yang CMT
Chief Technical Strategist