When you trade in a highly-leveraged market that’s potentially rife with risk, it’s not enough to just understand how the market works. You also need to be able to control your emotions and, more importantly, your reactions to what’s unfolding on your trading screen.
Trading in an optimal state is often guided by calculation. Sure, there’s room to operate intuitively, but only experience and practice can teach you how to separate smart “gut responses” from those based on fear and greed. If you’re still developing your sea legs in a live market, here are some of the more common emotions that you can expect to encounter.
Now remember, emotions can often get in the way of your performance, eroding eny edge you may have in the markets. So, let’s examine what these emotions are and come up with a few ways to deal with them so that they don’t end up ruining the best of your efforts.
Emotional trading can expose you to a lot of risk and can result in huge losses. Let’s break down the more common emotions that tend to disrupt trading performance.
Emotions That Can Disrupt Your Trading Performance
FOMO (Fear Of Missing Out)
FOMO, or Fear Of Missing Out, is what you experience when you see (or think you see) other traders making money on a hot trade. This is what many traders experienced when chasing “meme stocks” only to get slammed due to a late market entry or exit.
While FOMO is a natural “human” reaction, it can devastate your trading account if you’re not careful. When you make impulsive FOMO-fueled trades, you’re not making decisions based on sound analysis or a solid trading plan. This can lead to losses and erode your trading account over time.
FOMO is a very real threat to speculators of every level of experience. While it’s natural to feel like you’re missing out on a big opportunity, you need to resist the urge to make impulsive trades based on FOMO alone. Don’t chase anything that isn’t part of your strategy, analysis, or calculations. Focus on sticking to your trading plan, and make decisions based on sound analysis and good risk management principles. So, the next time you feel the pull of FOMO, take a step back, slow down a bit, and think carefully about your next move.
Fear of loss is probably one of the most common feelings you’ll encounter in the markets. It can show up in different ways, causing a wide array of behavioral biases that can lead to trading mistakes.
For instance, if a trade starts to go against you, the fear of losing your hard-earned money can make you hesitate to cut your losses, even prompting you to “double down.” But delaying the realization of a loss can also lead to even bigger losses down the line.
On the flip side, when you’re in a profitable trade, the fear of the trend suddenly reversing can make you close out your winning position too early. This can prevent you from maximizing your gains and leave you feeling frustrated.
Remember, everyone experiences fear when trading, but it’s important to recognize and manage it. By keeping your emotions in check and sticking to your trading plan, you may be able to avoid making costly mistakes driven by fear.
Greed is right up there at the top of the list near FOMO and fear. Sure, greed can be a motivating force, pushing you to explore new trading strategies and find promising opportunities. But if you’re not careful, greed can also lead to making impulsive decisions that can be downright dangerous.
Sometimes, the desire for profit can cause traders to throw caution to the wind, ignoring their trading rules, and neglecting sound risk management principles. This kind of reckless behavior can turn trading into more of a gamble than a calculated endeavor.
If you let greed take over, you might find yourself making impulsive decisions that aren’t based on rational thinking. So it’s important to keep your emotions in check and make sure you’re always trading responsibly. Remember, greed isn’t always a bad thing, but you certainly don’t want it to cloud your judgment and lead you down the wrong path.
In the world of trading, hope can often be one of the biggest obstacles standing in your way if it’s accompanied by greed and fear, and it can lead to some risky decisions.
When you’re in a losing position, it’s natural to cling to any glimmer of hope that the trend will reverse in your favor. But holding on too long and delaying the realization of a loss can be a costly mistake that only ends up making things worse.
Another way that hope can turn against you is when you’re trying to make up for past losses. In these situations, traders might desperately take on much bigger trades than they can really afford, aka “revenge trading.”
To avoid falling prey to the negative side of hope, stay disciplined and stick to your trading plan. Make sure you have a solid understanding of risk management principles and don’t let your emotions cloud your judgment.
Feeling anxious is a natural response to situations which feel uncertain or with which you’re not entirely familiar and comfortable. Given, in any market scenario, the direction of the market is always uncertain. The outcome of a trade can never be absolutely certain. But this doesn’t mean you have to feel anxious.
If you’re feeling anxious about a trade, it usually means you’re not prepared for the reasonable outcomes that might unfold. You probably suspect there’s a negative outcome which you haven’t considered or which your setup isn’t equipped to handle.
If this is the case, then it’s important to be even more prepared for the next trade. Go through all your estimates and prepare more carefully. In this way, you’ll have run through all of the more likely outcomes in your head before committing your money to the trade.
This is usually what gets traders who are new to the markets and running on a hot streak of luck. The reason for this is that many new trades can’t easily distinguish luck from skill. Many haven’t yet experienced a “smart” trade resulting in a loss, but they’ve experienced many not-so-smart trades that have yielded positive outcomes.
As you know (or will find out), nothing in the market is certain, and returns will always be interspersed with losses. If you respond to losses with frustration or regret, then it means you probably haven’t done the necessary preparations, or you’ve deviated from a well-prepared trading plan.
Don’t let overconfidence get in the way of your capacity to analyze, think thoroughly, and trade according to plan. You might get away with it sometimes, but when reality throws cold water on your over-optimistic sentiment, the reckoning can feel much worse, emotionally and financially.
The Bottom Line
Don’t get the wrong idea and assume that trading requires you to ignore or turn off a critical part of what makes every trader human. We all feel emotions. Instead, you have to try to turn down the volume knob on some of the emotions that can disrupt your performance, and/or exercise control over your actions in response to your emotions. Everything above boils down to preparation, estimates, and running through every likely outcome in a trade. Once you’ve done that, then you’re more or less expecting one outcome out of the many you’re already “seen” ahead of time. Good luck!
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.