Emotional Trading — How to Recognize it, and Avoid it
As a trader or investor it can be hard to tell if you are sticking to your trading plan because you are being level-headed, or because you feel you have to make up a previous loss. The thing about trading is, anytime you are trading because you feel you need to make up a loss, you are mad about a previous loss, or feel like you are “under-the-gun” to make up the loss, this is emotional trading. There are of course other characteristics that play into emotional trading such as just being overly stressed from everyday life, not getting enough sleep, and not having a good diet.
Even though trading is something most do in solitude in their home offices or trading-desk cubicles, a lot goes in to the daily life of a trader. First is health. In order to trade properly, your body and mind need to be sharp so you can always ask yourself “is this a good reason to enter/exit” and “why am I making this decision”. If you always answer these questions before making a decision, you will be much more likely to be making a good choice, but your brain needs to be sharp to stay alert and focused. I do not mean drink Red Bull or coffee to make sure you are awake, I mean eating healthy foods, and doing it routinely. When considering health the main contributing factor to this in my opinion is routine. If you have the same routine of when you wake up, and when you eat your meals, you are already half-way there. The second part is making sure it is nutritious food. I am not saying to go and completely change your diet or become a vegetarian, but make sure you are not constantly eating fast food and fried food all the time. Keep a balanced diet, if you do not normally eat fruit for breakfast, add a couple strawberries or a banana in there with your diet once a day and you will be surprised at the changes you see in your health and focus.
Another factor of the “health” topic is working out. Even just doing some push-ups and crunches in the morning is a good habit to get into. You’ll get your blood pumping, feel good, and it’s a proven fact that even just 30 minutes of being active per day has massive health benefits. To fit this into my own routine, I work out for 30 minutes when I wake up, shower, and then make breakfast. I am normally sitting at my computer with my morning cup of coffee by 7 am. Yes, 7 am. Why so early?
To be a serious trader, it’s just like any other job. You need to be on time. If you work from home, and fall into the routine of sleeping until 10 am, and not sitting at your computer until noon, you’ve missed all the action by then and don’t have enough time before the end of the trading day to make any profitable trades. Most traders that want to work from home fall into this routine and then consistently lose money leading them to over trade, and worse yet, emotionally trade because they feel they aren’t making any money.
So, good routine, good diet and a little working out every morning and being at your desk no later than 8 am in the morning? Think you can swing it? Good. Now, if you do these things, you’re already 10 times less likely to take part in emotional trading because you feel better inside and out. So how do you recognize emotional trading? As I stated before, if you had a loss, or a losing streak, and feel you need to make up the loss so you are immediately re-entering positions without much thought, ignoring your trading plan, or succumb to that otherwise “casino” mentality. You’re emotionally trading. To stay away from this it’s actually quite simple. The first step is the golden rule of trading: Never trade with more than you can afford to lose. See my articles on Risk Management for more information on this, I also just wrote a “part-2” to this article as a follow up and more in-depth look aat risk management as well which can be found here. If you lost a trade and immediately feel sad, or mad, that it was a loss, it is probably because you did not stick to your risk management plan. Always have a set amount you enter into a trade with, and a set stop-loss amount so you never succumb to this. Usually if you feel as though you need to make up a loss, it is for this exact reason.
How do you remedy this? Do what I do. If you use certain indicators to base your trade decision off, always use your system. Do not ignore it! You put all that time and effort into making it for a reason, so use it, every time! Also, take other factors into account like the price-action and larger timeframe trend, patterns etc. but all that stuff and the technical stuff surrounding it is for another article.
To sum up, the easiest ways to avoid emotional trading is to first and most importantly, be on a routine that includes some kind of physical activity for at least 30 minutes a day, a good diet, and getting enough sleep. The second is to follow your trading plan and always ask yourself “should I be entering/exiting here” and “why”. The third and as in my opinion as important as the first is your risk-management plan, this is how you preserve your wealth, and your portfolio, and end up profiting from it. I hope this article was helpful! Until next time. Happy trading!
