Emotional traders’ most common mistakes

Here are some common mistakes that emotional traders make:

Over trading, trading impulsively, revenge trading, missing trade after trade, hesitating, chasing the market, entering late, taking premature profits, moving stops too close to the market or too far away from the market, breaking their rules or blowing up their accounts.

Do any of these sound familiar?

When I first started trading “professionally” I felt desperate to prove that I could make it without another source of income. I spent countless hours at the screen, studying price action and searching for the perfect entry for my next trade.

Since I was “full time,” I felt the need to always be in the market, taking trades that did not fit my plan because it was my “job” and, in my mind, that meant I needed to always be “working.”

I took larger losses than I did when I was not a pro, moving stop losses down in fear of barely missing the next big move or taking a significant hit to my trading capital early in my career. I also took profit far too quickly, fearing that price would turn against me and I would miss the opportunity to make money.

These were all emotional decisions that cost me money. Luckily, I reeled in my emotions quickly and was able to turn my bad habits into lessons.

Acknowledge fear vs greed

Fear and greed are the two most common emotions that traders experience, and these account for most of the poor decisions that lose them money.

Fear is often caused by trading with too much size, compounding the consequences of a bad decision. Traders often make mistakes when they are in too large of a position that they would not make otherwise.

Fear is also common when you take a trade with little conviction — you know that you are in the “wrong” trade but are unsure how to escape. Fear is what makes us sell our winners too early and hold our losers too long.

In the movie Wall Street, Gordon Gekko famously stated that “greed is good.” A certain amount of greed is necessary because it's required to make speculators want to trade in the first place.

The downside to greed is that it causes traders to “chase the market,” or FOMO into bad positions. An example is buying after a large sudden move higher when the market is already overbought and demand is waning.

Greed also causes traders to hold a position past their target, often failing to exit at the right moment, right before the price turns the other way. So how do we fight the pitfalls of trading with too much emotion?

Failing to plan is planning to fail

Develop a system and stick to it. Have specific criteria for entering and exiting trades. Always trade your plan. Have your entry, stop loss and take profit levels mapped out in advance — don’t change them once you are in a trade.

Be patient and wait for your entry. Entering into mediocre trades will yield mediocre results. If you only trade the best opportunities you will trade less but you will have greater success. Write down your rules. Do nothing unless every rule is satisfied.

Treat trading like a business

If you are a full-time trader, then you need to approach trading like a business. Create a business plan and edit it monthly. Keep a trade journal and study your past mistakes. Have specific rules for taking profit to pay your bills and cover expenses. Set achievable goals and incorporate daily activities (studying markets, reading financial news, paper trading, etc.) to keep your emotions at bay.

You will be less likely to force trades out of boredom or because you feel internal pressure to be productive. Without a plan, you are likely to wake up each morning and force bad trades with no real direction.

Never watch the scoreboard

The only score that matters is the score at the end of the game. Avoid checking your portfolio or trade status repeatedly — set it and forget it. The more often you check to see how your trade is doing, the more likely you are to make an emotional decision to either exit too early or move your stop loss.

Know when to trade

Staying away from suboptimal market conditions is prudent. The crypto market, and more specifically, the altcoin market, is rarely tradable. Wait for the right moment to execute. Only trade when you are in the proper mindset. Don’t look to the market to make you feel better; if you aren’t up to trading the simple solution may just be to step away.

Trade with the proper size

Nothing causes more fear than trading with too much size. Start small and scale up as your portfolio and comfort level grow with the market. Scale in and out of positions to minimize the emotional drain from exiting too early or too soon.

Have a life outside of trading

Spend time with your family and friends. Go to the gym regularly. Eat healthy food. Turn off your phone and don’t check your portfolio regularly. Keep specific trading hours, and do not trade during your leisure hours. Nobody can trade 24/7 — it causes mental fatigue and poor decisions. Get a life!

There are numerous steps and techniques that a trader can use to eliminate emotion from their decision making. Find what works for you and stick with it. Control your feelings and become a successful and profitable trader.