Trade with Clarity: The Power of Objective-based Trading

How to manage your emotions and stay objectively sound in making trade decisions?

10 min readApr 28, 2023

Trade with Clarity: A collage of eyes and facial expressions depicting various emotions including surprise, happiness, anger, and sadness. The words “Respond, don’t react” are written in black letters on a white background, with the medium-sized text “Trade/Clarity” in black outlined text. The word “EMOTION” is written in bigger letters, embedded with a red marbling effect at the left side in vertical orientation. | Photo by various artist, Unsplash | @LouisJavier_THM

Part 6/8: Managing Your Emotions — Trade with Clarity

In the fast-paced world of trading, it’s easy to let emotions cloud your judgment and make impulsive decisions. However, staying objective and maintaining a clear head is crucial in trading.

In this article, we will explore the power of objective-driven trading and provide practical tips on how to manage your emotions, make rational decisions and improving your trading performance. As the legendary investor once said.

“The stock market is a device for transferring money from the impatient to the patient.” — Warren Buffet

Let us be the patient ones and let that patience manifest in this article.

1. Developing a Trading Plan

A well-defined trading plan is critical for your success in trading. And having a solid trading plan in place, you can stay focused and avoid impulsive based decisions.

Regardless of which trading style you prefer (scalping, day-trading, swing trading) follow your plan: Example.

Day Trading Plan:

Entry and Exit Rules: Look for currency pairs that exhibit strong trends and have clear levels of support and resistance. Use technical indicators such as moving averages, MACD, and RSI to identify entry and exit points. Set a profit target of 2% to 5% per trade and a stop-loss of 1% to 2%.
Risk Management Strategies: Use a position sizing strategy that limits exposure to any single trade to 1% to 2% of the account balance. Use stop-loss orders to limit losses and avoid emotional trading decisions. Avoid over-leveraging and always have a risk-to-reward ratio of at least 1:2.
Trading Goals: The goal of this plan is to achieve a monthly return of 5% to 10%. Track performance and adjust the plan as necessary.

Scalping Trading Plan:

Entry and Exit Rules: Look for high volatility stocks that are trending upwards or downwards. Use technical indicators such as moving averages and trend lines to identify entry and exit points. Set a profit target of 1% to 2% per trade and a stop-loss of 0.5% to 1%.
Risk Management Strategies: Use a position sizing strategy that limits exposure to any single trade to 1% to 2% of the account balance. Use stop-loss orders to limit losses and avoid emotional trading decisions.
Trading Goals: The goal of this plan is to achieve a daily return of 0.5% to 1%. Track performance and adjust the plan as necessary.

These are just two examples of trading plans, and there are many different approaches that traders can take depending on their personal preferences and trading style.

2. Emotional Awareness

Our emotions play an important role in trading as it empowers traders to recognize and comprehend their emotions impact on their decisions. With strong awareness of your emotions, you can make informed and logical decisions and maintain a balanced approach.

To achieve emotional awareness, traders must:

Fear-based decisions: Recognize the impact of fear on your decision-making process, you can take a step back, assess the situation objectively, and make informed decisions based on your trading plan.
Greed: Acknowledge this emotion, you can avoid taking unnecessary risks and stick to your trading plan, thus preventing losing profits.
Frustration and Impatience: Identify these emotions, you can avoid making impulsive decisions and stay disciplined, waiting for the right conditions to exit a trade.
Knowing when to take a break/s from trading to prevent becoming overwhelmed or stressed, that’s part of emotional awareness.

3. Practicing Patience

Being patience is a vital trait of traders. A well-developed sense of patience can help traders avoid impulsive decisions. That is why experienced traders understood the importance of taking time to prepare and analyze the markets before making a trade.

Rushing to enter a trade is based on emotions, while waiting for a clear trading signal that confirms your entry point is called being patient.
If you believe in the long-term potential of a trade, don’t be tempted to exit too soon. Be patient and wait for the trade to play out, even if it means enduring short-term fluctuations.
A sign of impatience and can lead to significant losses. Be patient and wait for high-quality trading opportunities to present themselves.
Resisting FOMO (Fear of Missing Out): Don’t be tempted to enter a trade just because you’re afraid of missing out on potential profits. Be patient and wait for a clear signal to confirm your entry point, even if it means missing out on trade/s.
Sticking to your plan and being patient, you can avoid impulsive based decisions and make more informed and objective decisions.

4. Staying Disciplined

Discipline in trading is very important, as it can help you stick to your trading plan and avoid impulsive based decisions. Experienced traders maintain discipline by sticking to their plan and avoiding chasing losses.

Follow the set entry and exit rules and avoid making impulsive decisions based on emotions. Stick to your trading plan
Set stop-loss orders to limit your losses, protect your trading capital and avoid taking on too much risk in any single trade.
Stick to your trading plan and avoid the temptation of ‘overtrading’, making trades outside of your strategy.
Avoid distractions and focused on your trading goals and strategies. Set aside specific times of the day for trading and minimizing distractions from social media or other sources.

Stay disciplined and focused on your trading plan, you can improve your chances of success and avoid emotional mistakes that can lead to losses.

5. Treating Trading Like a Business

If you treat your trading like a hobby and have no real goals, then it will be an uphill battle to make sustainable progress. To get past the hobby mentality and quantify your goals, you should treat trading like your personal business.

Develop a trading plan that includes your trading goals, strategies, risk management and entry and exit criteria. Treat it like a business plan.
Keep detailed and accurate records of your trades, including the date, time, instrument, entry and exit price, and profit or loss and even the motivations behind the trade. Analyze your performance and make informed decisions.
Set up a dedicated workspace for your trading activities, complete with all the necessary tools and equipment. Maintain focus and stay organized in your space just like you treat a business.
Regularly monitor your trading performance and make adjustments to your strategies as needed. Stay on track toward your trading goals.

By treating trading like a business, you establish structure and discipline, which are crucial for success in the long run.

6. Managing Your Time

Day trading can be mentally and physically exhausting, so it’s important to manage your time effectively. Take breaks when needed, and don’t trade for extended periods without taking breaks your emotions might kick in.

Set aside specific times each day for trading and stick to them. Maintain focus and avoid distractions.
Create a to-do list each day and prioritize your tasks based on their level of importance. Stay on track and avoid wasting time on unimportant tasks.
It’s important to take breaks throughout the day to avoid burnout and maintain focus. You could take a walk, do some stretching exercises or simply take a few minutes to relax.
Focus on one task at a time to avoid feeling overwhelmed and to ensure that you give each task your full attention.
It’s important to make time for other areas of your life, and maintain a healthy work-life balance. Avoid burnout and maintain a positive outlook on trading.

7. Controlling Your Risk

Day trading involves a significant amount of risk, and it’s important to manage that risk to protect your capital. Use stop-loss orders to limit your losses on each trade, and never risk more than you can afford to lose.

Use stop-loss orders: Set stop-loss orders to limit your losses in case a trade move against you. Stay in control of your risk and avoid significant losses.
Diversify your portfolio: Avoid putting all your eggs in one basket, spread your risk in different assets and reduce the impact of market volatility.
Limit your position size: Avoid taking on positions that are too large, set limits on your position size as per your account size and risk tolerance.
Avoid trading with emotions: Keep your emotions in check and stick to your trading plan and avoid making decisions based on fear or greed.
Use risk-reward ratios: Calculate the risk-reward ratio for each trade to ensure that your potential gains are worth the risk you are taking.

8. Establishing Trading Parameters

Establishing clear trading parameters to help you avoid emotional decisions. Setting these parameters can ensure that you are not making impulsive decisions based on emotions and that you are only taking trades that fit within your predetermined criteria.

Position Sizing: Determine how much capital to risk on each trade based on your trading strategy, risk tolerance, and account size.
Risk Management: Develop a clear plan to manage risk, including stop-loss orders, trailing stops, and other risk management strategies.
Entry and Exit Rules: Establish clear rules for entering and exiting trades based on technical analysis, fundamental analysis, or both.
Trading Plan: Develop a comprehensive plan outlining your trading goals, strategies, and parameters. Review and update it regularly.
Backtesting: Test your trading strategy using historical data to refine it and establish more effective trading parameters.

9. Maintaining a Positive Mindset

Cultivate a positive mindset by practicing gratitude, focusing on your progress and accomplishments. Having a positive mindset, you can approach trading with a more optimistic and confident attitude, which can help you better manage your emotions.

Practice gratitude: Take time each day to reflect on what you are grateful for, both in your personal life and you're trading. Maintain a positive attitude and keep setbacks in perspective.
Visualization techniques: Visualize achieving your trading goals and performing well in the markets. Stay motivated and focused, even during difficult times.
Mindfulness practices: Practice mindfulness techniques, to help you stay present in the moment and avoid getting caught up with your emotion.
Positive affirmations: Repeat positive affirmations to yourself, such as “I am a successful trader” or “I can handle market volatility with ease”. Reframe negative thoughts and maintain a positive mindset.
Rather than beating yourself up over mistakes or losses, use them as learning opportunities. Analyze what went wrong and how you can improve your approach in the future.

10. Maintaining Objectivity

Emotional responses can cloud a trader’s judgment and lead to irrational decisions. Experienced traders strive to maintain objectivity and avoid letting their emotions dictate their decisions.

Develop a trading plan that includes entry and exit points, risk management strategies, and other important details. When you stick to your plan, you can avoid making impulsive decisions based on emotions.
Use objective criteria to make trading decisions, such as technical indicators, fundamental analysis, or other data-driven approaches. Avoid relying on subjective factors that may be influenced by emotions.
Develop techniques to manage your emotions, learn deep breathing, meditation, or taking a break when you feel overwhelmed. Stay calm and objective in the face of market volatility or other challenges.
Ask for feedback from others, such as a mentor or trusted colleague, to help you stay objective and avoid blind spots in your trading strategy.

In conclusion, maintaining objectivity and managing emotions is crucial in trading. By staying focused on your objectives and using these practical tips you can make rational decisions and improve your trading performance.

Remember, patience is key, and the stock market is a long-term game. As you continue your trading journey, always strive to learn and grow your skills.

Let’s take control of our emotions, stay longer with our trades. Take this quote with you.

“Emotions are the enemy of logic.” — Frank Underwood

So, what steps will you take to become a more objective-driven trader? Share your thoughts and experiences in the comments section below, and let’s continue the conversation and help each other become better traders.

Hope you find this article helpful in your trading journey. Do you have any questions or areas you would like to explore?

Let’s make this discussion more fascinating and friendly! Remember, trading is a continuous learning journey, and we can all support each other along the way.

Next Topic 7/8: Continuous Learning — Becoming a Competent Trader

Poster: Trade with Clarity: Emotion, more posters here.