What comes to your mind when you think of trading? I’m sure that the majority of you would be thinking about buying, selling, technical analysis, indicators, etc. Well, you have missed one of the most important aspects of trading. It is your own emotions. Yes, emotions play an important role in your daily trading activities. Trading in the Forex market is not entirely similar to real-life trading or business. In a conventional business, there is no such thing as emotions. Even if there is, it won’t affect the business to a great extent. However, when it comes to doing business (trading) in the Forex market, things are quite different.
While trading the Forex market, a trader goes through a roller coaster of emotions. There are many people engaged in conventional businesses and succeeding in their respective fields. But in the business of Forex trading, the amount of people who succeed is minute. Even if they have an immense amount of knowledge in this field, they fail. This is because of their inability in controlling emotions. We have the 95:5 ratio for a reason. And, emotions are one of the major factors that separate the 5% from the 95%. Therefore, controlling emotions is essential. If one does not cultivate the habit of controlling emotions, it can ultimately damage their trading account to the extent of reaching bankruptcy.
How can emotions annihilate a trader in the market?
Missing a trade
This happens a lot of times, typically for a part-time trader. Let’s say a trader follows a trade for a week. He observes that all the criteria to take the trade has been satisfied. But, due to one reason or another, he ends up missing it. This creates frustration in the trader as a week’s worth of effort has gone in vain. Therefore, the trader now starts to take trades even before its ready to take off. And, this would definitely lead to stop-losses as the timing is incorrect.
Enticement by seeing large candles
This is another major issue with many novice traders. When these traders see a couple of green candles just shooting up, they get enticed and hit the buy button. There is no logic behind the buy. They only have the thought that ‘it’s going up, so it will go up much further.’ There is no reason behind their thinking. They don’t understand that they are buying it at a very high price. For example, if a shirt costs $50 initially, and after some days the price rises to $100. At this time would the same trader we were talking about buy the shirt? It’s obvious that he will not. But, when it comes to trading, the same trader is enticed to hit the buy when seeing the price rise swiftly.
When people see these three candles going straight up, they cannot control their emotions. They buy it at such expensive prices. And, the result of the buy can clearly be seen in the chart below. Also, when the price comes down to the area where buyers shot up, people even add positions as the price begins to hold and go up again (indicated by the arrow). Therefore, in the end, they incur bigger losses.
This is a common problem among many traders. This has always been the hardest emotion for a trader to control. Greed is the root cause of damaging profits. The better one understands this statement, the better trader they become. For example, a trader has taken a trade and is currently in profit. Let’s say the trade has hit the take profit as well. But, the trader observes that he has not made enough money on it. So, he does not close the trade and holds on to the trade until he is satisfied with the profits and we never know what would happen next.
How do successful traders handle their emotions?
Successful traders handle emotions to the best of their abilities. This is what makes them a successful trader. They have an organised set of rules, and they take trades only when all the criteria in the set of rules are satisfied. Below are some of the traits of a successful trader.
Greed is undefined in their dictionary
These traders take what the market gives them. Once the price hits the target, they close it without a second thought and move on to the next trade.
They never expect from the market
Professional traders are always aware that the market can do anything. In case the market does not move as they envisioned, they change their plans accordingly. Therefore, metaphorically, we can say that they move like water.
They do not trade to make a quick buck
Unlike amateur traders, experienced traders do not trade to make money quickly. They are always patient on the trades. Even if the payout is less, they give it the required time. While amateur traders risk most of their capital to obtain more profit in less time. If they have a win on it, they risk even more and at the end of the day, they lose all of it. Basically, amateur traders are very impatient.
How can one improve trading by controlling emotions?
Always start small
In the greed of more profit, never increase your lot size. If you are trading with a large lot size and end up losing a trade, it will affect your emotions big time. You are then going to trade with that mindset which can cause a lot more problems in analysing your upcoming trades, making the situation worst. Hence, it is always recommended to start small.
Don’t look at the charts constantly
Once you are in a trade, keep your targets and stop-loss and move away from the chart. Because if the market starts to go against your direction, it can cause panic and you might even close the trade even before it has hit the stop loss. While, in the end, it may reach your take profit. So it is better not to look at the charts constantly, once you enter the trade.
Therefore, trading by having control over emotions can drastically change one’s results in trading. Emotions play a role as important as technical analysis. Use emotions as a powerful tool in your daily trading activities rather than succumbing to them. Always control your emotions, never let them control you.