Do you have moments when you thought your market analysis was excellent, but you panicked and sold your winning stock too early? Or you held a losing trade for too long, believing that something to happen? If this sounds familiar, you're not the only one! It's common for people to think that they will become consistently profitable by being good at charting and indicators—they don't realise that they need to master their mind!
Many people who are successful traders view the trader's mindset as 80% psychology and 20% strategy. Without proper trading psychology, even the most complex strategies (using sophisticated analytical tools or basic indicators) will subsequently fail. This guide offers several strategies to control your emotions when trading to develop the discipline required for long-term success.
Enroll in Emotion Controlling Course
Two Biggest Emotional Traps
One of the most common battles in the stock market is between two competing emotions, fear and greed. Both of these can be very powerful and can control your ability to make sound trading decisions. If you want to develop sound trading psychology, you must first recognise and neutralise the impact of both these emotional forces.
1. Fear (The Premature Exit)
Fear is a mental blockage that stops traders from following their plans and, as a result, causes traders to take small profits more often or not take a valid trade.
Loss Aversion Trading: Loss aversion is the cognitive behaviour that makes the pain of losing feel worse than the pleasure of winning. It can lead to traders holding onto losing trades for much longer than they should have, hoping they turn around, and/or to stop losses being set too close to their trade entry price, making them susceptible to being stopped out due to random market movements.
Overcoming FOMO Trading: FOMO is a derivative of fear that makes a trader want to get into a fast-moving trade at the very end because everyone else is making a profit from it. It results in buying high and/or selling low.
2. Greed (The Reckless Entry)
Greed is the excessive desire for wealth through trading that leads to emotional trading. Greed makes a trader think they can manipulate the market, often just after experiencing some level of trading success.
Overconfidence Bias: The Overconfidence Bias occurs when a trader becomes overly confident because of a few successful trades and begins to think he or she is untouchable. This causes the trader to trade too much, lose sight of their risk parameters, or increase their position size dramatically on the next trade, which ultimately sets them up for a major loss that will wipe out all of the recent gains they made.
Revenge Trading: Revenge Trading is one of the worst habits a trader can develop. After losing, a trader will feel angry and want to get "revenge" by immediately making another trade without fully analysing it. This almost always results in the loss being compounded.
Check Out Our Course for Stock Market Online
The Mindset Pillars of Emotional Control
In order to best control emotions while trading, you need to create a structured, objective (non-emotional) framework of rules so that no specific situation will leave room for emotional decision-making, these structures are the building blocks of true trading discipline.
1. Develop an Unshakeable Trading Plan
An unyielding trading plan serves as your objective rulebook and keeps you sheltered from the "noise" created by the market. Your plan should specify exactly where you are entering, where you are exiting, how much to invest in each trade, and where you are going to place any stop-loss orders before placing your order to execute the trade. If you create a trading plan that is absolute and unable to be compromised, it will make it easier for you to avoid making impulsive and emotional decisions about a trade while in the heat of the moment.
2. Master Risk Management (The Ultimate Regulator)
Risk management is the foremost component of successful trading psychology. By risking too much, you are likely to engage in emotional trading.
Follow the 1-2% rule: Professional traders only risk between 1%-2% of their total trading capital on each trade. For instance, if your trading account is worth Rs. 100,000, the maximum amount you could afford to lose on any given trade would be Rs. 1,000 to Rs. 2,000.
The Psychological Advantage: Lowering your potential loss creates a less likely chance of it having emotional implications on you. A loss of 1% is negligible; whereas, a 20% loss is paralyzingly devastating, often resulting in Revenge Trading behaviour. By adhering strictly to risk management psychology, you will minimise this fear's effect and create greater ease in following through with your strategies.
3. The Power of Journaling
In addition to profit/loss tracking, your trading journal should record your emotional state.
Emotional Tracking: For every trade:
What was your emotional state prior to entering a trade? (confident, anxious, calm, etc.).
What was your action during the trade? Did you hold firmly to your stop-loss or adjust it? Why?
What emotions did you feel immediately after completing a trade? What was the cause of your success/failure emotionally?
Tracking and analysing repeatable patterns of emotion on your trades can help you develop greater self-awareness and continuously enhance your performance.
Join Our Risk Management Course Online
Actionable Techniques to Regain Control
You will be able to re-focus your attention and exercise trading discipline by utilising immediate and practical techniques when the market is moving against you, and your emotions are running high.
1. Practice Pre-Trade Acceptance
Before entering a trade, mentally accept two important facts:
The Loss: The opportunity for losing the amount you have allocated for the trade is 50-50. Therefore, it is best to mentally accept the possibility of losing 1% of the amount allocated for the trade.
The Process: Your objective is to execute your trading plan correctly on a consistent basis rather than just concentrating on the outcome of this trade. Successful traders possess a psychological trading ability to concentrate on the consistency of the trading process, rather than on the profit or loss of a single trade event.
Experts: According to Mark Douglas, author of Trading In The Zone, 'The key to your trading success lies in your ability to prepare yourself mentally for all potential outcomes.'
2. Implement the "Three-Strike Rule"
One of the best methods for preventing the onset of an emotional spiral after encountering a loss is to establish a predefined period of time for cooling off.
Set a Rule: If you have incurred three consecutive losses (no matter how small), you must cease trading for the remainder of the day.
Reset: Step away from your screen for a brief period of time, and go for a walk or perform another non-focused activity. This will serve to break the emotional momentum of loss and provide you with the opportunity to reset your mindset for the next trading session.
3. Trade the Setup, Not the P&L
Once you establish a trade position, remove or minimise the view of your live profit and loss reports on your trading screens. If left on screen, a trader will be continually bombarded with fluctuating profit and loss (P&L) reports, which is the most significant emotional trigger for a trader’s emotional trading behaviours. Traders should commit themselves to developing their trading system and sticking to it (i.e., allow the stop loss/index or the take profit to manage their position rather than relying on emotional signals).
Follow Our Trading Rules and Strategies
Conclusion
Perfecting your trading psychology is the most critical component of a trader's risk management system. The edge you gain in the market isn't because of a secret indicator, but because you developed an unshakable trading discipline that allows you to carry out your trading plan precisely, no matter what your prior trade was, even if it was your largest loss.
Today, all traders should work to create a better trading mindset. Here are a few suggestions you can implement to begin building your trading mindset:
Risk no more than 1-2% on every trade.
Review your emotional state when you enter trades and causes of negative emotional behaviour in your trading journal.
Remember that market success is achieved less by avoiding losses, but rather by consistently managing your emotions and maintaining the success of your trading strategy through hundreds of trades.
-work.jpg)
.jpg)
