In this article we discuss how a stock market trader can control emotion when trading. Trading can be very emotional but we provide the secrets on how to control emotion while trading, and these secrets are absolutely critical to becoming a successful stock market trader.
How to control emotion when trading – which emotions are at play?
The stock market is driven, basically, by a whole boat load of people placing orders to buy or sell. These people are filled with emotion but two emotions in particular are at play, when trading. The emotions at play are FEAR and GREED. Here are some examples of how the emotions of fear and greed can affect a trader when s/he is trading:
- When entering a trade, the trader can get in too early (greed);
- When exiting a trade, the trader can exit too late (greed);
- When entering a trade the trader can miss out on the entry (fear);
- When entering a trade, the trader can close too early (fear);
- When looking for a market to enter, the trader can ‘stretch’ their entry criteria to markets which do not really meet the original criteria thereby allowing the trader to enter trades on markets they wouldn’t have entered without the emotion attached (greed);
- When the trader has taken a few losses in a row, the trader can become fearful of the next trade and this can affect logical decision making (fear);
- When the trader has taken a few profits in a row the trader could become complacent and start ‘overtrading’ (greed).
As you can see, there are a number of scenarios where the trader can be affected by these two emtions. So how do traders control emotion when trading?
How to control emotion when trading (fear and greed) – which trades to place?
The first step in how to control emotion when trading, which every new trader should be aware of is that he/she should be looking to place the same types of trades over, and over and over again. Types might include breakout trades, buy the dip etc. By placing the same types of trades over and over, the trader will slowly but surely develop confidence in his/her strategy, or be clear that what the trader is doing, is not working statistically. The trader will be acquiring very unique statistical data to do with the trader’s own personal trading style. S/he can gather information about how many losses or profits to expect in a row before it switches the other way – thereby keeping the trader calm when they know in the long run, the strategy is profitable overall. (If the strategy turns out to be unprofitable, keeping statistical data gathered on the same types of trades empowers the trader to acknowledge, accept and move on from something which is undeniably, not working – perhaps to try a different approach -but this should only be done when the particular strategy has been given a fair chance). A trader should look to place 30 + trades on a particular strategy to see the win rate. The win rate can fluctuate wildly at the outset because the population of trades is not large enough for the win rate to have any meaning. The writer has found that after about 30 trades this starts to settle down and with 100 trades the trader can really be sure of the win rate of what he/she is doing.
Second but just as important – Risk Management!
Another crucial step to controlling emotion when trading is to practice good risk management. We have provided a key article here on this:
A trader will find that if they are controlling risk effectively, this effectively keeps their emotions more ‘caged’ than the scenario where risk is not being managed effectively. For eg. when combined with the point above about placing the same types of trades and understanding the strategy being applied on a statistical basis, when the risk on each trade is low, the trader will not be worried about taking four losses in a row in the same way they would if they were risking half of their capital balance on each trade! They would soon be out of the game in this second scenario and would probably give up and start smashing their computer (not unheard of in the writer’s experience).
The writer believes these two single items can help any trader manage their emotions successfully. We hope you found this article helpful.
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