Weekly Trading Lesson: Controlling Emotions
As traders, we constantly hear the phrase, “you have to be able to control your emotions to trade successfully”, or some derivation of that common theme. So what exactly is behind that statement? What emotions? How do we control them? What are these people talking about? It is a phrase we hear so often, it becomes this loose abstract concept with no clear rules, and at some level, easily ignored. While intellectually, most understand the importance of controlling emotions, once in a trade, the intellect and logic of a trader become altered. This is a very subtle, almost imperceptible shift in real time and the clear recognition of letting your emotions dictate your trading decisions often only occurs after the crucial emotional decision was made. “I can’t believe I did it again”, is an all too common sentiment immediately after a hasty exit from a poorly executed trade. We have all been there. So how can we move to correct this potential trading pitfall?
What is an emotion?
The definition of an emotion is a natural instinctive state of mind deriving from one's circumstances, mood, or relationships with others. For our purposes, we can classify an emotion as the natural instinctive state of mind deriving from one’s current trade.
How do we control our emotions?
I think the first step to controlling our emotions as traders is to identify, with specific terms, the exact sentiment behind the emotion. An emotion or sentiment that I often speak of is the feeling that you might be missing something if you do not enter a trade. A trader who is not in control of this process might enter a trade on less than ideal confirmations because they are afraid to miss the opportunity to profit. Making a profitable trade feels good. The risk of loss is ignored in those few crucial seconds before entering the trade in the desire to get that good feeling once again. But traders (especially newer traders) should not be too hard on themselves if they find themselves making this mistake. While an impulsive decision it is also a natural instinct.
What actions can we take to control our emotions?
Awareness of this process is the first step in overcoming the tendency. The question to ask yourself is: Am I entering this trade because I see a clear opportunity with the complete understanding that I might be wrong and therefore controlling my risk or am I entering the trade because I am envisioning the good feeling I will get when I exit the trade with a profit? A professional trader views the market through the lens of risk, not potential profit.
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