While traders can’t stop feeling emotions because they are human, they can remove acting on their emotions in their trading. Feeling emotions and letting them influence your entries, exits, and position sizing are two different things.
How do traders remove emotions?
Many new traders will find the most difficult thing about trading is not the math, the research, or choosing the chart to trade. Dealing with the emotions that arise while trading can be what causes failure. Beginning with the stress of entering a trade, to the fear of losing the paper profits that they’re holding in a winning trade, how they deal with those emotions will determine success more than any other one thing.
Emotions can be removed from trading by accepting them as they arise, being mindful of them, but not acting on the impulses. It’s okay to feel emotions, they are messengers of danger and most arise from the fight or flight response for self preservation. However, there must be a space between the feelings and the action taking. You must use your mind to make your trading decisions guided by your signals and system.
If you are chronically overstressed, your heart is pounding, your leg is bouncing, or you feel out of control then something is deeply wrong with your trading. You are either trading far too big, you don’t have a system with an edge, or your need for the money is too great to keep you rational. Find and fix the problem to bring yourself down to a more manageable level of calmness.
How do you trade without emotions?
To trade without emotions is to operate like a business. You have a trading system with an edge that you understand. You execute your edge systematically with your quantified entry and exit signals using proper position sizing. You take on enough risk to make the wins meaningful but not enough to cause a level of stress that is not manageable.
You focus on executing your trading plan in the market. When you have no signal, you do nothing. You’re not impulsively trying to make money everyday, you are patiently waiting for your set ups and good risk/reward ratios for entries. Profitable trading can even become boring when you’re doing it right and just execution your system with proper risk management.
How can I overcome my fear of trading?
Fear is an unpleasant emotion caused by the belief that there is danger that is likely to cause pain or a threat. In trading, this can be a financial threat of loss or mental fear based on the ego. The fear is based on the belief in the probability of a future negative event happening.
The unknown is a primary source of fear. Information and data can help overcome this part of the fear of trading. You need to know about trading success stories so you know it’s possible to win. Backtesting price action signals and historical chart studies can show you how a system would have performed in the past giving you an understanding of the probabilities of it working in the future.
Developing a trading system that fits your own screen time, risk tolerance, and beliefs about the market can create a confluence of your trading actions and your psychology that overcomes the fear of failure. It’s crucial that your trading system has a positive expectancy as your wins should be bigger than your losses on average. This will help remove the fear of being unprofitable.
Each trade should be position sized in a way where it’s just one of the next 100 trades and not a major emotional event whether it wins or loses. Trade a size that keeps your fear of a losing trade down to a manageable level. Position sizing is like a volume dial on your emotions and if it becomes to loud it will be difficult to hear your trading plan over the emotions it causes.
Overcome your fear of trading through faith in your trading system and confidence in yourself as a trader to execute it with consistency and discipline over the long term. Experience with success and system execution builds up your trust in the system and yourself in time and overcomes fears.
What are the emotions in trading?
Here are some emotional equations to better understand the primary emotions in trading and why you feel them. The key is to process your emotions differently by changing your mental model from winning and losing trades based on results to good and bad trades based on execution. Also, thinking in probabilities and expectancy of your system’s results and not thinking every trade will be a winner removes most of the emotions and ego from the outcomes.
The = sign should be read as equals and the – symbol read as minus to understand the formulas here.
Losing Money – Trading Better = Despair
Don’t despair, look at your losses as part of doing business and getting you closer to the winning trades with your system’s edge.
Expectations – Reality = Disappointment
Have realistic expectations for your system performance based on it expectancy for win rate and size of wins. You can only realistically expect your system to perform based on your backtesting and chart studies.
Disappointment in a loss + Caused by lack of Discipline = Regret
If you followed your trading plan and lose money because the market did not move in your direction so be it, but if you went off your plan and traded based on your emotions and ego then you should feel regret and stop being undisciplined.
Winning Trades – Fear of Ruin = Enjoying your Trading
Trading is much more enjoyable when you’re risking 1% of your capital in the hopes of making 3% on your capital with a zero chance of ruin or have a very high winning percentage with very small losses when wrong. It’s not enjoyable when you are putting a huge percentage of your capital on the line in each trade and are only a few bad trades away from your account going to zero or a big drawdown.
Understanding what makes money + Years of successful trading = Trading Wisdom
To get good at trading you must trade real money. Wisdom comes from putting real money on the line for years and proving to yourself that you can come out a winner in the long term.
Belief through back testing + Experience of winning with it for years = Faith in your system
Whether any one trade wins or loses shouldn’t influence your faith in your system and trading method. You should trade in a way that each trade is just one trade out of the next 100, detaching your emotions from individual outcomes.
Emotional trading can be overcome when you remove doubts about your method and the risk exposure. When you have faith in your method, system, risk management, and discipline, you will overcome the emotional problems that arise in the heat of trading the market.