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3 Ways For Traders To Manage Unruly Emotions

3 Ways For Traders To Manage Unruly Emotions

2013-06-17 03:00:00
Tyler Yell, CMT, Currency Strategist
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Article Summary:Because trading is a flood of opportunity for both buyers and sellers, emotions often run rampant. However, making the best decision from a trading point of view is often the hardest emotional decision to make. This article will help you on the battlefield of trading by pointing out 3 key ways to keep your emotions in check so you can win the battle that so many before you have lost.

“Successful trading is always an emotional battle for the speculator, not an intelligence battle.”

-Jesse Livermore

Knowledge is paramount to trading well. There is no doubt that an understanding of different indicators to apply to a chart or understanding of the fundamental factors that show an economy’s weakness or strength can help you gain an edge. However, knowledge can only take you so far and those who focus only on knowledge or intellect are often standing in harm’s way when their money is on the line.

That harm shows up in the form of emotions. Emotions going unchecked often cause a trader to trash the concept of risk to reward or trade a very large size, which is a common predecessor to large losses. Therefore, the advanced trader would do well to know how to limit the negative effect of emotions on your trading.

Why Emotions Are A Problem?

Certainty in an executed trading idea is often a guise for greed and fear. As a trader, it is important to have a plan which focuses on entry triggers, trade size, and risk to reward ratios so that you’re acting in a mechanical manner. However, you should also be willing to exit your trade or accept the fact that moving forces in the markets can change quickly so you can avoid the painful experience of holding on to and closing out larger losses than winners.

Learn Forex: Emotions Alone Would Cause a Trader to Hold This GBPAUD Trade Short

3 Ways For Traders To Manage Unruly Emotions

The opportunities in the Forex market are almost infinite. Any trader around the world can trade on any time frame using nearly any strategy. In the end though, the market will either rise or fall and regardless of your strategy for identifying an entry, you need to know when to eject from the trade idea so that you’re not holding a long position in a bear move or a short position in a bullish rip higher.

3 Focal Points to Manage Emotions

1. Earlier this week, we discussed how key the concept of uncertainty is to our trading success . This belief that anything can happen at any time should allow us to be flexible on a mental level so that we’re willing to exit a trade with mounting evidence. From the start of your trading career, you should be able to avoid holding onto to any ‘Enron trades’ that can wipe a trading career off the map because you’re looking for new data that causes you to exit the trade.

2. Trade size is something that is more paramount to overall trading success than many new traders realize. Most new traders will run out to find and buy the hottest system on the market, which was likely optimized and back tested in market conditions that aren’t present and won’t perform close to their intended results. Here is a quote from a famous trader, Larry Williams that many admire after his great trading book, How I Made One Million Dollars…Last Year…Trading Commodities, hit the shelves in 1979 that discusses trade size:

“Thus, what we need to do is under-bet our system or approach. Do not put as much money behind the system as the numbers from the past suggest you can. For most of us a 5% risk factor is all that’s needed to do rather well in this business…Under-trade, under-bet and you will be overwhelmed with your results...”

-Larry R. Williams

Personally, I’ve noted that a smaller trade size keeps me more objective on exiting a trade as well as allows me to stay in trades longer. Objectivity leads me to focus on reasons to exit a trade when the facts supporting the trade change. The smaller trade size also encourages me to stay in a trend longer because I’m not as eager to close at the trade at the current profit but rather let the trend run its course which often surpasses what I expect. To learn other ways to manage your risk, you can register for our free online course here.

Learn Forex: Small Trade Sizes Allow Traders to Emotionally Ride Out a Trend

3 Ways For Traders To Manage Unruly Emotions

3. Lastly, a focus on exiting strategies over entries will give you a healthier view of the market. Many traders use candlesticks or an overbought / oversold reading on the Relative Strength Index (RSI) to get out of a move. The key point is that when traders focus only on the entry, they’re often likely to hold onto a losing trade until it breaks even and that is often the death-nail of a trader’s career that we heartily recommend you to avoid.

Closing Thoughts

The three concepts in today’s article are meant help align your thinking with that of professional traders so that you do not get emotionally attached to any of your trades. It’s commonly said, ‘there are old traders and there are bold traders, but there are few old and bold traders’. The truth that can be gleaned from that statement is that traders who have stood the test of time have found a way to conservatively grow their capital without absorbing career ending drawdowns and we hope you learn to do the same.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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Take this free 20 minute “Price Action - Candlesticks” course presented by DailyFX Education. In the course, you will learn about the basics of price action and how to use the clues the market is providing to place trades. Many traders feel the price is always the #1 indicator so it is helpful to know how to read it as it unfolds.

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