Emotional trading is the number one reason 96% of online traders lose money and quit trading forever.
We come to trading for one reason only: We want to make money.
So, you focus on the technical side of things; cramming as much information into your brain as much as possible.
You may even practice on the demo account and see virtual money roll in. But when you go live and start to risk your own money, it starts to prove otherwise.
You make mistakes, you abandon your trading plan, you lose money and you don’t understand why. All you do know is things are going wrong.
Sound familiar? That’s emotional trading.
In this article, 70trades wants to help you understand trading psychology and give you simple tips to protect yourself.
What is trading psychology?
It refers to the mental state and emotions that help you make trading decisions. Emotions are as important as other factors such as experience, knowledge, and skills in determining your success.
Picture this scenario.
You lose a trade and start to panic. You feel you need to make the money back quickly. So you abandon the rules and begin firing random orders at the market.
Or you don’t have a clear entry, but you’re sure the market is going to rally. You don’t want to miss out, so you buy into the market and never mind your rules.
Your trade gets to your target but you stay in because you think it will go further, and you want more money. Instead, it reverses and stops you out. A potential win becomes a loss.
Or the market approaches your stop and you move your stop to save your position.
Has this one ever happened to you?
The worst part is that you know it’s a bad idea. But you continue allowing your emotions to guide you. You advance in leaps and bound and you’re unable to stop doing it.
To solve it you first need to understand what the hell is going on.
Our brains work in terms of self-preservation- to keep us safe from danger. Or the need to want to feed our greed – make more money. Often called instincts.
So, how do you stop emotional trading?
Learn from experienced traders like 70trades
How do experienced traders stop emotional trading?
They handle their emotions well and know when to trade the market.
Here are a few tips
1. Avoid trading out of greed – Avoid anything that will cause a stressful emotional response. Avoid placing a bid when you feel fearful.
2. Prepare for the worst – markets can unexpectedly turn against you no matter how good your trading decision is. Always understand this and you’ll never get a shock when you make a loss. Mental preparedness will cushion you from negative emotions.
3. Never expect quick profits – Huge trading volumes and lot sizes are good for huge profits. But always consider the possibility of losing huge amounts of money too. Or worse the entire capital. Always follow good risk management.
4. Have a trading plan – A plan reduces risks and prevents emotions from affecting your decisions. Make your trading plan personal and follow it with uttermost discipline.
5. Walk away after you place the trade – Don’t keep looking at currency movements. They feed your emotions and they might tempt you to move your stop-loss hoping they will reverse. Or move your profit level hoping the trend will continue. You can always take a walk.
6. Use well-proven strategies – You’ll avoid losses when you stick to tried and true strategies. Don’t try to re-invent the wheel.
7. Take breaks– Always take a break once you have made three consecutive losses or profits. The fourth trade after consecutive profits is motivated by entire overconfidence. And the reverse is motivated by an extreme need to get back your money.
Master your emotions to gain long-term trading success
Now you know why 90% of online traders lose money and quit trading forever.
Failing to understand trading psychology and not being able to manage your emotions. Greed is an emotion. It leads to poor risk management – investing more than you should.
People want to make quick money, so greed makes them jump from a demo account without gaining sufficient trading experience.
If you learn the art of managing your emotions, you’ll certainly become an experienced professional trader.
According to 70trades, learning to manage your emotions requires persistence.
Over time, you’ll start to see the benefits of keeping your emotions under control. The benefits will serve as positive reinforcement to your brain to continue with good emotional habits and responses.
It gets easier with persistence and practicing wise risk management.