In the first few lessons of this course, we mentioned that during trading, you can be overwhelmed by various emotions — excitement, fear, greed, hope, regret and more. Each of these emotions affects your trading decisions. As a result, you need to recognize and control them.
Negative emotions
1. Fear is an emotion that traders feel quite often, particularly during times of market volatility. Fear of losses can prompt you to exit trades too soon or avoid trading altogether. Conversely, fear of missing out (FOMO) can push you to make hasty decisions. For example, you might see that an asset price is rapidly rising, so you open an Up trade without doing any analysis, and then lose money because the upward trajectory already hit its peak and has started descending.
Acknowledging these fears and making decisions based on rational analysis is crucial.
2. Greed, like fear, can lead to impulsive and risky trading decisions. When a Forex trade starts to yield profit, greed can tempt you to keep it open longer than planned in hopes of higher gains, often resulting in losses once the market changes. Greed can also lead you to overtrade or take on excessive risk on a single trade. For example, you may decide to open a trade using your entire account balance to get a bigger profit quicker. To manage greed, develop a trading plan, stick to it, and set realistic profit expectations.
3. Hope can be a tough emotion to deal with in trading. When a trade fails, hope can make you hold on to it while you wait for the market to reverse. This can result in even bigger losses if the market continues to move against you. It’s essential to have a clear exit strategy for each trade and be ready to accept any losses when they occur.
4. Regret is another common emotion in trading. You can regret missed opportunities or trades that didn’t go as planned. While it’s natural to experience regret, don’t let it dictate your future trading decisions. Instead, learn from these experiences to improve your trading strategy.
Positive emotions
Trading can also evoke positive emotions, such as excitement and satisfaction. These emotions can motivate and be rewarding, but they can also lead to overconfidence. For example, after several trades work out as planned, you may feel in control of the market and invest a large amount into a trade without careful analysis and planning. If that trade goes bad, it can wipe out your previous gains and put you back at square one. That’s why staying grounded and disciplined, even when successful, is crucial.
Managing emotions
Emotions are an integral part of trading, and it’s OK to feel them — you are a human being, after all. The goal is not to get rid of your emotions but to manage and channel them so their impact on your decisions is limited.
Here are the steps you can take:
1. Practice mindfulness. Observe your emotions without judgment and understand how they influence your thoughts and behavior. This awareness can help you react in a more thought-out and controlled manner.
2. Develop a trading plan and stick to it. This is a simple solution, yet one of the most effective for maintaining stability and control. Refer to the previous lesson about trading strategies to develop one for yourself.
3. Maintain a balanced perspective. If you see trading as a process instead of focusing on the results of a single trade, you can lessen the emotional highs and lows. That’ll make trading a more stable and positive experience. Every trade, regardless of its outcome, is an opportunity to learn and grow.
Next
In the next lesson, you’ll learn how to create a trading mindset that will help you make good trading decisions.