The ability to regulate one’s emotions when trading may be the difference between success and failure. Having a calm attitude is essential for regular trading, since it greatly influences the decisions you make, especially if you are new to the market. In this article, we discuss the significance of day trading psychology for both novice and seasoned traders, and we provide some advice on how to trade emotionally free.
MANAGING EMOTIONS IS ESSENTIAL WHEN TRADING
It is impossible to exaggerate the significance of emotional management in day trading.
Suppose you have entered a trade ahead of Non-Farm Payrolls (NFP) with the hopes of profiting handsomely in the short term if the reported number exceeds expectations and the price of EUR/USD rises swiftly.
When NFP is released, the results surpass expectations, just as you had hoped. However, for some reason, the cost decreases!
As you reflect on all of your previous research and the reasons why you believe the EUR/USD should rise, the price continues to decline.
Emotions take control as soon as you notice the red stacking up on your losing position; this is the “Fight or Flight” impulse. This tendency can frequently keep us from reaching our objectives, and for traders, it can be a major concern as it can result in snap decisions.
Expert traders want to ensure that one snap move won’t destroy their entire career; they don’t want to take the chance that it would damage their account. Learning how to reduce emotional trading may require a great deal of experience and numerous trades.
THE THREE MOST COMMON EMOTIONS VISITED BY TRADERS
Traders frequently feel fear, anxiety, conviction, enthusiasm, greed, and overconfidence, to name a few.
Fear or Unease
Trading too large is often the source of concern. Trading at the wrong size increases volatility unnecessarily and leads to mistakes that you wouldn’t ordinarily make under pressure to take on more losses than usual.
You could also be fearful or apprehensive because you are in the “wrong” trade—that is, a trade that doesn’t suit your trading strategy.
Belief/Excitation
You should feel excitement and conviction in every deal you make. These are the main feelings you should feed off. Any successful transaction requires conviction, and if you are not feeling excited or convinced about a particular deal, it’s likely not the “right” one for you.
“Right” refers to the trade that is in line with your trading strategy. Just like bad transactions might be winners, good trades can also be losers. The goal is to limit your wins and losses to wise trades. This can be ensured in part by making sure you are convinced about a trade.
Overconfidence and greed
You may be becoming greedy if you start to limit your trading to deals that you think have the potential to be huge winners. Even if your success may have led to your avarice, if you’re not careful, you could slip and find yourself in a difficult situation.
Make sure you are always employing appropriate trade mechanics (i.e., maintaining targets and stops, managing risk well, and setting up profitable trades). Overconfidence leading to careless trading can put an end to a successful run.
TOP TIPS AND STRATEGIES FOR CONTROLLING EMOTIONS WHILE TRADING
If you wish to avoid allowing bad feelings to influence your trade, you must carefully consider your strategy. In the world of financial markets, there is merit to the proverb, “Failing to plan is planning to fail.”
There are multiple ways to turn a profit as a trader. There are numerous tactics and methods available to traders to assist them in reaching their objectives. However, whatever strategy is going to be effective for that individual will typically be defined and methodical as opposed to being based solely on “hunches.”
Here are five strategies to help you feel more in charge of your feelings when trading.
1. Establish Personal Guidelines
You can better manage your emotions when you establish your own guidelines for trading. Setting risk/reward tolerance thresholds for entering and leaving trades, through profit targets and/or stop losses, may be part of your rules.
2. Trade in Appropriate Market Conditions
It’s wise to avoid unfavorable market situations as well. It’s wise to refrain from trading when you’re not “feeling it.” If you aren’t comfortable trading, the best course of action might be to simply walk away rather than depending on the market to lift your spirits.
3. Reduce the Size of Your Trade
Reducing the size of your trades is one of the simplest methods to lessen their emotional impact.
Here’s an illustration. Consider a trader who deposits $10,000 to start an account. First, our trader trades the EUR/USD pair for a $10,000 lot.
The trader notices significant variations in the account as the trade moves at $1 per pip. Our trader watches their usable margin of $9,680 vary by $1 each pip, with a total of $320 put up for margin.
Imagine for a moment that the same dealer makes a $300,000 trade in the same currency pair.
The transaction is now going at $30 per pip, and our trader has to put up $9,600 for margin, leaving them with only $400 in useable margin.
The trade is immediately ended as a margin call when the trade moves against our trader by just 14 pip, exhausting the useable margin.
The trader has no choice but to accept a loss since there is no possibility that the price would rebound and move the trade into lucrative zone.
The novice trader in this instance has merely placed himself in a situation where the chances of success were not favorable. Reducing the leverage can significantly lessen the likelihood that similar incidents will occur in the future.
4. Create a trading schedule and trading log.
Regarding the fundamentals, one tactic to keep in mind before major news occurrences is to prepare for many scenarios.
There may be a significant difference in outcomes between novice traders who follow a plan and those who don’t. The first step in combating trading emotions is to draft a trading plan, but regrettably, this won’t totally eliminate the impact of these feelings. It could be beneficial to keep a journal of your forex trades.
5. Unwind!
You’ll be more able to react sensibly in any market scenario if you’re at ease and like trading.
Conclusion:
The ability to control one’s emotions is essential for day trading success. Trading decisions and results can be greatly influenced by emotions such as fear, enthusiasm, and overconfidence. Establishing personal trading guidelines, selecting appropriate market conditions, lowering trade sizes, keeping a trading plan and diary, and being calm are all useful techniques to control these feelings. Through the application of these approaches, traders of all experience levels can augment their overall trading performance by strengthening their capacity for logical decision-making.