Trading Emotions: How to Control Emotions in Trading

Introduction to Trading Without Emotion

Trading based on emotions is one of the leading factors that cause beginner traders to fail in the competitive world of online trading. There are plenty of mistakes that traders tend to make when they base their trading decisions on emotions alone and although we are all emotional human beings, professional traders on the other hand have learned how to keep their emotions under strict control.

Trading decisions based on emotions are not based on logic and lead to losses while consistently profitable traders base their decisions on a well-developed strategy that was designed to keep emotions at bay. One of the ways traders avoid trading with emotions is through the use of stop loss and take profit orders. These orders help combat the fear and greed that trading can create.

The purpose of this article is to look at the common trading emotions that traders experience and how a good strategy can avoid the mistakes that go with emotional trading.

The Most Common Trading Emotions

  1. Fear.
  2. Greed.
  3. Hope.
  4. Boredom.
  5. Frustration.

Whether you are a beginner or a seasoned trader the chances are great that you have experienced all of the previously mentioned emotions somewhere down the line. Having a sense of trading discipline can help you trade with greater precision, whether you are trading forex currencies or any other speculative asset.

  1. Fear

Fear is number one on the list because it tends to wreak havoc on a trader’s psychology and trading accounts. We will mostly be looking at fear in this article because it’s probably the strongest emotion of all. Fear seems to creep in as soon as a trader starts trading with real money and had the painful experience of losing that money (sometimes many times over).

When it comes to fear there are 4 major ones related to trading.

  • The fear of losing.
  • Fear of missing out (FOMO).
  • The fear of a profitable trade turning into a loss.
  • The fear of being wrong about a trade.

The fear of losing is a common emotion in trading because we have grown up in a world where success is judged by how much money you have or how well you perform in your job. Unfortunately, the success rates of new traders entering the marketplace are very low and in most cases, this is because they lack proper trading education and a good strategy.

It is because of this that they feel psychological pain when losing their money and that pain causes fear. Fear that they can’t figure out how to be consistently profitable and fear that they cannot be successful in trading.

The fear of losing in trading often causes hesitation when it’s time to execute or exit a trade which in turn can make you miss a trading opportunity or execute your trades at the wrong time.

Not trusting a good strategy when it tells you when to enter and exit trades because you fear losses, will damage your confidence in such a strategy and your ability to execute that strategy flawlessly.

Even professional traders experience losses but the key thing that separates them from emotional traders is that they understand and trust their strategy’s statistical performance and their confidence to execute that strategy without fear.

Fear of missing out on a trade or (FOMO) is another major issue and a good example of this was the parabolic run that Bitcoin experienced in 2017. People who wanted to jump into the runaway bull market feared missing out on the profits they heard other people were making, so much so that they threw caution to the wind and just jumped on board.

trading without emotion

Although a lot of people who got in early probably made money, those who bought Bitcoin because they feared they would miss out, jumped onboard too late in the Bull Run and got burned when the price came crashing down in spectacular fashion.

Trading and investing in the financial world requires planning and a strategy to make money from the markets. Trading decisions based on FOMO is irrational and the markets tend to punish those that act in this way.

The fear of a profitable trade turning into a loss is often felt by traders who have experienced more losses than winners in the past. So much so that whenever they see a profit on the table they want to take it as soon as possible so that they can feel like a winner.

Traders who feel this fear often close out their trades too fast just to see the market go into their intended direction afterward without them. They then tell themselves “If only I held onto that trade, I would have made much more money!” This is hindsight behavior and traders without a strategy that was designed to maximize profits and minimize risk tend to make this mistake often.

Experienced traders have the ability to let their profits run and know how to minimize their risks.

The fear of being wrong about trade has more to do with a trader’s ego wanting to be proven right, rather than focusing on the business of making money. If you had a strategy that you know is consistently profitable then you would not have any fear that trade may not work out.

Traders who experience this fear will yet again make the most common mistakes like banking profit too quickly or widening their stop losses in the hope that the trade would go in their favor again.

There will always be losses in trading and they have to be accepted as part of the business and if you fear that you may be wrong about a trade then you are setting yourself up for failure.

  1. Greed

Greed is an emotion that often creeps in when traders have been on a prolonged winning streak which makes them feel invincible, giving them the feeling that trading is easy.

Traders that are greedy often break their trading rules by increasing their position sizes or allowing for larger losses they wouldn’t normally take. This behavior is similar to gambling and in the gambling world the casino has the edge not you.

Greedy traders will often be taught a lesson by the markets because their decisions are based more on impulse than actual sound rational strategy.

  1. Hope

Traders who find themselves in a losing position and fail to admit that they may experience a loss often turn to hope as their savior. Hope would then allow them to widen their stop losses or make up for past losses. We all know how this tends to turn out. There is no place for hope in trading. In fact, hope can be even more distracting during periods of high volatility.

  1. Boredom

Trading profitably requires a tremendous amount of patience and planning. So often traders would become bored because they do not have the patience to wait for their strategy to tell them it’s time to trade.

Trading just for the sake of doing something because you are bored is trading without a plan and will more often than not lead to losses. In case you did manage to make profit after a boredom trade then you stand the chance of doing it again which creates bad habits.

  1. Frustration

Frustration can have many causes like being frustrated with yourself not following your trading plan or frustration because you are experiencing a prolonged draw down in your account.

Being frustrated with yourself can be cured when you manage to follow your strategy rules without deviation yet the frustration that goes with draw-down periods should not be a problem if you know what your strategy is capable of and have confidence in it.

How to Control Emotions in Trading With Strategy

A good strategy should allow for rules that keep traders from experiencing these negative emotions and at the same time build confidence in a trader’s ability to follow those rules no matter what.

Once a trader starts seeing positive results on a long-term consistent basis then the emotions that go with trading tend to fade away. This is only possible with a decent strategy that has stood the test of time.

The Exponential Profits System (EPS)

After years of testing and fine-tuning I have developed a strategy that aims to achieve one specific goal:

Finding the end of corrections within a trend and entering positions once the trend resumes again.

Although this goal may sound simple it does require a strategy that breaks the process of finding the end of corrections into smaller manageable steps. Each step has its own function to achieve the final goal.

Following these steps enforces discipline and patience and prevents a trader from experiencing negative emotions.

Strategy Overview

Finding the end of corrections using my strategy requires the following steps:

  1. Identifying trend direction.
  2. Identifying the type of correction and using market geometry techniques to determine where such a correction could end.
  3. Following a set of rules-based entry conditions to limit risk and enter trades.
  4. Managing my open position until my targets are hit or my trailing stop gets taken out.

Next, I will give you a quick overview of how I followed these steps on a recent trade setup in Crude Oil.

Step 1: Identifying trend direction

Trading emotions

I use 3-time frames when trading and the first chart that I looked at was the 4-hour chart from where I determined trend direction using simple trend lines. On the chart above it was very clear that Crude Oil remained in a strong uptrend and that price has not yet broken below its previous upward sloping trend lines.

Step 2: Identifying the type of correction and using market geometry techniques to determine where such a correction could end

how to control emotions in trading

On the 3rd April 2018, it became clear that Crude Oil was correcting downwards in a typical A-B-C type of format and when I trade corrections I like using what is called a pitchfork (blue and red lines) to determine where such a correction may end.

Over the years I have found that corrections like to end at these red or blue pitchfork lines before they reverse into the main trend direction again. Working on the assumption that Crude Oil was indeed correcting I identified a price zone where I thought the correction would end, ahead of time.

Step 3: Following a set of rules based entry conditions to limit risk and enter trades

trading without emotion

Price reached my lower red pitchfork line within my entry zone as expected on the 4th of April 2018. This alerted me to start looking for an entry but only after I have seen a certain set of entry conditions present at that low.

Using a smaller 5-minute time frame I could see that price momentum was slowing down on my MACD – Histogram and diverting from price action. This was my first condition and it has to happen within my price zone and at one of my pitchfork lines.

My second condition was to wait for some sort of reversal candlestick pattern before I could place an entry order with a stop loss. The red oval on the chart above indicated that I had a green reversal candlestick at that area and that it was time to place my orders.

Step 4: Managing my open position until my targets are hit or my trailing stop gets taken out

Trading emotions

I love managing my open positions with a pitchfork as well but this time angled in the direction I want to trade-in. After entering that trade I set 3 targets on the way up and I was fortunate enough to have my first target hit very quickly. This allowed me to move my stop loss to above breakeven and to start trailing that order once my additional targets are reached.

Note: At the time of writing this article this position was still open and whether my upper targets will be reached or not is up to me BUT what you should take note of is that I planned my trade ahead of time, had the patience to wait for my entry rules and managed my trade according to additional rules. Following the steps in my strategy helped me avoid negative emotions and the mistakes that go with them!

Another trade example on USD/CAD

how to control emotions in trading

On the 14th March 2018, I was looking for a setup to go long in USD/CAD and identified an entry zone at my lower red pitchfork line.

trading without emotion

As soon as price reached my entry zone and touched my red pitchfork line on momentum divergence and a bullish reversal candlestick pattern, I knew it was time to buy this currency pair.

Trading emotions

This was one of those trades that took a tremendous amount of patience to manage. I knew beforehand where to take partial profits while trailing my stop according to my rules. My final target was eventually reached allowing me to book a total profit of 542 ticks with only an initial risk of 12 ticks!

Having the ability to do that builds confidence and in the end, eliminates emotions from your trading.

Conclusion: Trading Without Emotion

When I showed you the trade examples above, I intended to not only give you a glimpse of my strategy but more importantly to show you that all the negative emotions that go with trading, can be managed when you follow a strategy designed to deal with these aspects of trading.

At no time was I worried about fear, greed, etc. because I learned to trust my strategy and I have confidence in myself to execute this strategy. Not all of my trades are winners but when they do work out they generally bring in large profits.

Trading emotions, how to control emotions in trading, and trading without emotions can be managed with a strategy like the one above.

If you enjoyed this article then please check out more about my strategy here.

Until next time

All the best

Richard K

how to control your emotions while trading

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