I felt no one heard the word emotion trading, but it’s true that also exists in the trading world. On top of that, it plays an important role, and traders started reacting with emotion in the situation of losses or profits.
Controlling emotion in the trading world is the toughest task because, unintentionally, traders react and open up their emotions with anger, fear, sadness, and happiness because of stop losses, profits and the win-win situation.
When the traders use stop-loss orders and exit from the position automatically, it creates an emotion in the trader’s mind.
I am trying my level best to provide detailed information about emotion in trading.
What is Emotional Trading?
Emotional Trading is defined as when the traders open out their feelings or emotions at the time of trading. It can be in any form – anger, fear, happiness, or sadness. These emotions impact the decision-making skills of traders. Pretending emotions in trading have adverse effects because it influences the decision-making skills of a trader.
Victor Sperandeo stated, “The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.” This quote is well suited for emotional trading because traders have to make practical decisions in trading. Most probably, emotions negatively impact the trader’s mind, and he is incapable of thinking logically.
How To Identify Signs in Trading?
There are some signs through which you can identify emotions while trading:-
- Panic selling a share is the first emotional sign in Trading because the traders have lost a few points.
- Sticking into falling assets because it “owes” the trader a return is the second sign.
- Hiding the current market rates or price updates is the third sign because traders fear losing money.
- Trading without a stop loss is the fourth sign.
Types of Emotions Trading
The fear is one of the common emotions that can be seen on the face of traders. Fear pretends in many ways, and because of that, some traders make mistakes.
Many traders close their positions or sell their assets because of losing money; as a result, sometimes, they have to bear hefty losses.
The fear of declining asset prices develops in traders’ minds, and they get delayed in realizing losses which further turn into greater losses.
On the other hand, fear of giving profits lets traders close the position of assets too early and which also turns into losses.
Greed is good to some extent, but this emotion forces traders to make impulsive decisions that should be avoided at any cost in trading.
Traders who have a trait of greed don’t obey money management principles as well as don’t think about uncertainty or risk. Greed acts like gambling in which traders do trading without planning or without setting trading rules.
Hope, fear, and greed work parallelly. Whenever the price of securities goes down, the trader hopes for good results or profits, giving traders more chances to grow. When traders try to cover up past losses, they enter into a trade with a position that covers losses to some extent.
The regret is a common emotion that could arise when the activity is completed or happened. Regret emotions could arise in the following circumstances:-
- Regret after exiting from a profitable situation as the price of assets continued to rise.
- When you see that the price of a particular asset is increasing rapidly, you start feeling regret that why you haven’t invested in that particular asset.
- You found a good asset for trade, but due to some reasons, you won’t be able to trade. Later on that asset started working well and you started regretting why you haven’t traded.
- After closing/ exiting the position and then you have observed that the price is reversed. You will feel regret why you exited at the stop loss.
- Many More reasons
Effective Tips Help in Controlling Emotions Trading
Below I have mentioned some of the effective tips that help traders to control their emotions in trading.
- Make a trading plan in advance.
- Set a fixed stop that you stopped your position
- Don’t be confused with FOMO
- Keep a plan in your mind always
- Follow each trade with fear
- No need to keep a record of profit & loss
- You need to manage the stops very carefully
- Never ever give up
- Think Logically
Many people use stop-loss order in buying or selling the assets because of the greed and fear emotions that help to take trading decisions effectively and efficiently. On the other hand, anger and regret are the two powerful emotions that disturbs the trader’s mind and because of that he makes hasty or wrong decisions.
So, it is vital to control your emotions in trading as it adversely affects your pocket (profit or loss) knowingly or unknowingly. Being a human, emotions are natural. So keep it away when you are trading or dealing in the financial market. It is good to adopt a disciplined approach.