Emotional Trading – A Guide to Mastering Emotion-Based Trading

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Emotional baggage follows us in all aspects of our life and of course trading is no different. Your mind and your attitude can be your biggest allies as you pursue trading goals. They could also hinder you from being the best trader that you can be. What can you realistically do to ensure that your emotions don’t get the better of you?
Read on to learn all about emotional trading and our top tips to master it.

Principal Points

• What is Emotional Trading?
• The importance of knowing yourself and your comfort zone
• How mistakes can help you learn

What is Emotional Trading?

In a nutshell, emotion-based trading or emotional trading can be described as any trading decision that is based on your instincts or feelings. Our brain is a complex mechanism that has been wired for survival over the millennia. Instincts like fear, anger, and greed have been ingrained in humans to help them to survive in situations of grave danger. Doubtlessly, we no longer live in situations where our lives are constantly threatened. Our fight or flight reflexes, however, have remained and so to some extent still have an impact on our decision-making process. These reflexes or emotions can also impact our trading decisions, and in some instances hinder us from making the most beneficial choices if they are our principal decision-making mechanism.

Know Yourself

Knowing yourself is essential, not only as a trader but in all aspects of life. Without knowing ourselves we cannot take steps to become the best versions of ourselves and master our goals and dreams. When trading you need to be able to identify the areas that require improvement and which areas constitute your core strengths. When it comes to emotion-based trading it is important to identify which situations trigger an instinctive response. Does a losing trade lead you to take hasty decisions that turn out to be less than ideal? Do you feel a sense of guilt when you miss a ‘golden opportunity?
Different scenarios trigger different responses for different traders. It is important to identify yours and subsequently devise a strategy that can help you to keep rash decisions under control.

Know Your Comfort Zone (And Go Beyond)

Being aware of your strengths and weaknesses is the first step to mastering your emotions. Here are some of the most common emotions that might influence your trades:

Fear

Fear is probably the principal emotion that takes over and hinders us from seeing things objectively. You might have experienced trading scenarios where you were afraid of failing. For most traders it can be paralyzing because we often feel the burden of the responsibility towards the capital that we have.

Greed

Gordon Gekko might have said that “The point is, ladies and gentlemen, that greed, for lack of a better word. Is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.” Greed was definitely an important instinct that served humankind throughout its evolution. This approach might not be the ideal attitude for the modern-day trader. This can lead to recklessness which could, in turn, result in overtrading and abrupt choices.

Anxiety

We become anxious when our subconscious perceives an element of danger. When it comes to trading, anxiety can manifest itself in the form of indecisiveness or at the other end of the spectrum: excessive impulsiveness.
How can you counteract these instincts? Keeping a detailed log of your trades will help you to dissect and analyze where you might have made a snap decision that was not based on quantifiable data. Analysing your actions will help you become more disciplined in the future.

You Are Not a Robot

An academic study conducted among day traders shows that an emotive response is a common human response and even factors like the environment, the weather or the amount of sunshine can affect our decisions. In short, we are not bots that live in a vacuum but unique individuals that bring their own personal take on trading. Your uniqueness is an important element that can bring that something extra to your trading story, so do not shy away from being you as the complete one of a kind person that you are.

Mistakes Help You Learn

Making mistakes is a key component of any learning process. It is from these mistakes that we learn more about ourselves and the area in which we are operating. We cannot stress enough how important it is to not beat yourself up. On the contrary, being your biggest supporter when things don’t go according to plan will give you the confidence to look at things objectively. and realize that your losses and your gains are all part of your story as a trader. Being judicious and looking at your missteps objectively will help you to actually reduce the number of errors in the long term.

Do not get discouraged when a mistake happens. Most importantly, don’t let it deter you from making the rational decisions that will help you to get on the right path again.
Just like everything in life, you improve by being aware of all your strengths and weaknesses. Mastering your instincts is the first step to making sure that they are only one of the elements that you factor in when making your trades.

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