Chapter 6 - Trading philosophy and capital management
7 Tips to Avoid Emotional Trading
- Determine your personal traits.
- Develop and follow the trading plan.
- Be patient.
- Be adaptive.
- Take a break after losing.
- Accept your winnings.
- Maintaining a trading log.
1- Determine Your Personal Traits.
A key feature for developing successful trading psychology is identifying your personal traits early on. You will need to be honest with yourself and say if you have reckless tendencies or if you are prone to act out of anger or frustration.
If this is the case, it is important to keep these traits under scrutiny while actively trading, as they can lead you to make quick and unpleasant decisions with little analytical support. However, it is also important to play according to your personal strength. For example, if you are calm and naturally focused, you can take advantage of these attributes during your time on the market.
Just as important as identifying and realizing your personal traits and emotions, since they recognize your prejudices, as mentioned above, biases are an innate aspect of human nature, but you should be aware of what individual biases are before opening or closing any positions.
2- Develop and Follow the Trading Plan.
Having a trading plan is crucial to ensure that your goals are achieved. The trading plan works as a basic plan for your trading, and it should highlight your time obligations, your available trading funds, the risk\ reward ratio and the trading strategy that you feel comfortable with.
For example, a trading plan can make it clear that you will stick to one hour every morning and evening to trade, and that you will never commit by more than 2% of your portfolio’s value for any single position. This can help reduce losses and limit the impact of emotions on your trading as the rules for opening or closing positions have already been established for you.
Trading plans should also consider individual factors that may affect your trading discipline, such as your emotions, prejudices, and personal traits. If you clarify what your biases are before you start trading, you may be less inclined to act on them.
3- Be Patient
Patience is an integral part of discipline, and it is important that you have patience in your attitudes. Acting on feelings like fear can push you to miss a profit by closing a position early. Trust your analysis and be patient and disciplined. Equally, when considering entering into a trade, it is important to be patient and wait for the right moment, rather than just jumping into the trade at that time and there.
For example, if you want to speculate in some of the GBP currency pairs such as EUR \ GBP or GBP \ USD, you might want to wait a little before the BoE announcement as there are increasing volatility at this time.
4- Be Adaptive
Although it is important to have a trading plan, remember that no two days in the market are the same, and that winning lines do not exist in trading. With that in mind, you should be comfortable assessing how different the markets are from day to day and adapt accordingly.
If there is more volatility in one day compared to the previous day, and the markets are moving in a particularly unexpected manner, you may decide to suspend your trading activity until you are sure that you understand what is happening. Adaptation can help you reduce your emotions and rule out biases of analog and real situations, enabling you to assess each situation based on its own merits; ensuring that you are pragmatic during your time in the markets.
5- Take A Break After Losing.
Sometimes after a loss, the best thing you can do is to walk away from your trading account for a short time to organize your thoughts and compose yourself, rather than rushing into another position in an attempt to recover some of your losses.
The best traders are those who bear their losses and use them as learning opportunities. They usually take a few minutes for themselves before returning to their platform, using this time to evaluate the error that occurred for this particular position in the hope that they will avoid making the same mistake in the future.
Doing so, they monitor feelings like pride or fear by letting themselves calm down before approaching the next trade with a clear head and sound judgment.
6- Accept Your Winnings.
Just as important as taking a break after losing is to quit smoking while you progress and get your profits. A series of victories or a particularly big win can make you feel invincible and can later rush to another position to try to do it all over again.
You may even open a series of new positions in the belief that none of them will fail because today is your "day" in the markets. This may cause you to take unnecessary risks or diversify your portfolio very quickly without performing an analysis in each of the respective markets.
Happiness can be as dangerous as anger during your time in the markets, and therefore, it is important to be aware of when your decision may weaken or may have a negative impact on your trading psychology.
7- Maintaining A Trading Log.
The trading history will enable you to record all your losses and wins, as well as the feelings you were experiencing during that particular position. As a result, it is the culmination of all the previous points in this article, and it can be used to assess whether what you did in any given time was a good decision or not.
For example, a trading log can be used to record a time when you choose to reduce your losses and the final price that the asset reached. By doing this, you can tell if you had made the right decision or not. Likewise, it can be used to record when you accept your winnings and if your emotions played a role as to whether you choose to close this position early or late.
Abstract in Trading Psychology
- Trading psychology is all about your thinking during your time in the markets, and it can provide an explanation of your profits or losses.
- It is important for you to be aware of your weaknesses and biases before entering into trading operations, but it is also important that you understand your strengths.
- Learn from your victories as much as you learn from the losses you incur, but remember that winning points do not exist in trading and that each position must be evaluated based on its own advantages
- The difference between a good day and a bad day in the markets may be knowing when to take profit or reduce loss.
- Keep your trading log as a record for you to see what worked, what didn't work, and whether your decision at that time was correct or was too late. Use this information to improve future decision-making
In order to successfully avoid the many pitfalls of active trading, adequate time and effort must be given to a sincere evaluation of a person's emotional and psychological state. Achieving a state of mind that promotes successful trading is a full-time business and the related discipline. Developing a comprehensive trading plan and the ability to execute that plan without any hesitation or bias is a key aspect of trying to achieve long-term profitability.
Technical Analysis: Trading psychology is often important for technical analysts who rely on charting techniques to advance their business decisions. Security planning can provide a wide range of ideas about the movement of a stock or currency. Although technical analysis techniques and charts can be useful in identifying trends in buying and selling opportunities, they require an understanding and intuition of market movements derived from investor trading psychology.
There are many situations in technical planning where a trader must rely not only on seeing the chart but also on his knowledge of the stock or currency that he pursuits and the intuition of how broader factors affect the market. Traders who pay close attention to the overall stock price effects, discipline and confidence, show a balanced trading psychology that usually contributes to profitable success.