Trading Psychology 101 - Your Ultimate Guide to Beating Trading Emotions
There are 2 reasons why you will fail to become a successful trader; trading without a strategy and trading your emotions...
On this page, I will share everything I know about controlling your trading emotions, including my best tips on how to better manage your emotions when trading.
I have been trading for over a decade and consider myself a trading psychology expert!
"Becoming a successful Forex trader should be very simple - develop a profitable trading strategy and stick to it... The challenges of trading psychology and a lack of emotional discipline are to blame for blown trading accounts and for traders losing money. A profitable trader is an emotionally disciplined trader..."
Trading Emotion - the killer of dreams!
Many of you reading this have a dream - a dream to become a trader! Unfortunately for you, the road to becoming a successful trader is not easy (but then nor is anything worth achieving in life!).
On your Forex trading journey there are a number of obstacles - some small, some large - that block the way to reaching your journeys end; the land of profitable trading! With some time and effort, many of these obstacles are easy to remove, but there is one obstacle in particular that proves extremely difficult - almost impossible - to even wobble... The obstacle of trading emotion!
The emotional and psychological challenges of trading are felt by all. In fact, most of you reading this article are not currently profitable because of these challenges! Did you know that over 90% of losing traders are losing due to their lack of emotional discipline? Wow!
Whenever I meet with a new student, one of the first questions I ask is, 'why are you currently not profitable in trading?'. The answer is usually connected to a lack of trading strategy or a lack of emotional discipline.
Can you relate to this? Have you felt the pull of negative emotions when you've been trading? Keep reading, this post is going to really help...
Trading Psychology 101
The psychology involved in trading Forex, stocks, futures, or any other financial market, is extremely interesting. A lot of the trading emotions you feel and the psychological challenges you face are founded on 2 things...
1. Expectation (mindset)
Whenever our expectations are not met, it is natural for us to feel disappointed. When similar (or the same) expectations are not met continually, it is natural for that disappointment to grow deeper and stronger, to the point that the disappointment develops into discouragement, resentment or frustration. In fact, the root of all your disappointments, discouragements and frustrations is expectation. There will be more about this later.
Impatience, especially when dealing with monetary gain, is a key component to the psychological and emotional structure of trading. The inability to wait for a decent return can be the foundation of all your emotional challenges. Don't believe me? Read the story below...
The host of a famous TV documentary stood in the centre of a busy city
He had a handful of cash
He stopped people randomly and asked them the following question...
'Would you rather I give you 100 dollars or 105 dollars?'
Of course, all who were asked replied with the answer, '105 dollars'
The TV host then asked a 2nd question...
'Would you rather have 100 dollars right now (showing them the 100 dollars in his hand), or 105 dollars in 30 days time?'
Almost all those that were asked replied, '100 dollars now!'
What a thought-provoking experience! If you give it some thought, you will realise that these people were speaking and making decisions based on emotion rather than logic. It makes total sense to accept the larger offer! But the fear of not getting the money in 30 days time, or the instant gratification of having the money now, leads the individual to choose the most irrational answer.
Unfortunately, this is why most people fail at trading- they let their emotions dictate their decisions, rather than logic dictate their decisions! It makes total sense to delay the gift for a short time, in order to receive a greater gift. Most people acted on their instant gratification though - they chose to forgo something better, simply because they were not willing to wait a month!
"I thought I was a patient man until I had kids! I thought I was a disciplined man until I became a trader! You will learn so much about yourself as you learn to trade. Most of all, you will learn how emotionally weak you are. Weaknesses can become strengths though - there is hope - you can do this!
Common Psychological Challenges...
Trading emotion can reveal itself in many ways. For some Forex traders, they become fearful. Others become stressed and anxious.
Soon I will teach you how to have greater control over these negative emotions and how you can manage these feelings. For now though, let's focus on identifying some of the most common trading emotions and how they can impact your trading...
Fear - this emotion is the most common amongst traders. It can crystallise itself in many ways...
Fear of losing trades - many traders fear having losing trades. They don't want them. They hate it when a stop-loss is triggered and their account balance shrinks slightly, especially if they are on a losing streak and have had consecutive losing trades already. This fear can lead traders to stop trading and miss profitable trading opportunities. Having losing trades is part of trading though. It is inevitable.
Fear of losing profits - after having a decent winning trade and showing a healthy profit, some trades are then struck with fear as they don't want to risk what they have made and potentially lose their gain. Some traders may think that they are just being sensible by ring-fencing their earnings, but the reality is they have become emotionally attached to their profits and fear losing them. Any trading decision that is based on emotion - no matter how sensible it may seem - qualifies as emotional trading. End of.
Another example of this fear is not letting positions run long enough. The trader fears losing the current floating P&L, so closes the position early, instead of letting it run and accumulate greater profits.
Fear of missing out (FOMO) - some traders don't want to miss out on the next big money making opportunity, so they take trades based on this fear. They think to themselves, "I don't want to miss out on the next bitcoin rally" or "I don't want to miss the next potential US Dollar move". As they take trades based on these thoughts, they are simply trading their emotions.. Sound familiar?
Greed - being greedy in Forex trading is not as common as being fearful. Most traders than suffer from greed usually let their positions run for too long, in the hoping of making even bigger returns. This eventually backfires though, just like all emotional trading does!
Traders that are driven by greed also tend to push strategies and time in the market to the max. Instead of being happy with today's returns, they continue to trade to the point that they are over-trading. This often leads to unnecessary losses and burnout.
Boredom - too many traders enter the industry with wrong expectations. They want excitement, quick returns and a Lamborghini! What they don't realise is that the most successful traders and most reliable trading strategies wait for the right trading opportunities. Many traders get bored of waiting for these trading opportunities, so they decide to make their own "opportunities"... Guess what? This fails. Why? Because the trades were emotional, not logical.
Impatience - this can be the root of all your trading emotions... i.e. Because of your lack of patience in waiting for a trade, you become fearful and enter a trade based on emotion. Or, because of your lack of patience in your account growth or performance, you become greedy and risk far too much per trade. Not willing to be patient is the key to trading failure.
Impatience in trading is closely followed by boredom, greed, fear and other negative emotions. In fact, a lot of these emotions are intertwined and closely related.
Please note - I think it's important to note here that there are positive trading emotions. Such as, satisfaction, ecstasy, excitement, enjoyment and pride. These emotions should not be eradicated or looked down on. Becoming an emotionally disciplined trader is not about managing all your emotions - good and bad - it's about controlling the negative emotions only!
"Fear, greed, boredom and impatience... These are the emotional demons that seek to ruin you as a trader"
The Emotional Cycle i.e. The Losers Cycle!
Because of trading emotions, becoming a market wizard and beating the market is not easy. Whether you plan on trading stocks, Forex or commodities, you are going to face emotional and psychological demons.
Watching traders overcome these trading challenges is both inspiring and exciting! Unfortunately, many traders don't overcome them, even with the best trading strategies. What's worse is that they continually fall into the same emotional mistakes and fail at the same psychological obstacles.
It's true that developing emotional discipline and learning how to manage your trading emotions takes time. Many traders have had plenty of time though and are still falling short of reaching the land of profitable trading... Many traders will let fear, greed, boredom or impatience beat them every time.
Many Forex traders are stuck in an emotional cycle, which I call 'The Losers Cycle'.
The cycle is like this...
Step 1. Find, create or learn a trading strategy
Step 2. Trade the strategy
Step 3. Become emotional
Step 4. Give up
Step 5. Go back to step 1 and repeat
Almost all losing traders are in this cycle. They are the strategy hoppers. They are the ones that blame the strategy or the broker for their constant losses and blown trading accounts. They are the traders that fail over and over again because they constantly become victim of their own emotions - they ruin it for themselves! If they had an edge, it is gone due to their lack of emotional discipline.
But, guess what? There is hope! These people can change. They can become successful.
If you are stuck in an emotional trading cycle, then keep reading...
How to Manage Trading Emotions - My Top Tips
So far I have covered the what, why and how of trading psychology and trading emotion. Time for the main show... How do we control our Forex trading emotions and - in the process - become successful...
The first thing to mention is that there is no key to entirely eliminating trading emotions. They are part of you and will always be around - even after 10 years of trading I still face negative emotions when trading! The key is to reduce the intensity of these emotions and to do your best to manage them.
Below are my tips on reducing trading emotions...
Reduce your trading capital - there is an undeniable emotional attachment to money, especially when it comes to trading. This emotional attachment intensifies if you are trading with more money than you are comfortable losing or if you are trading with money that you cannot afford to lose.
Why put yourself through so much pain? Simply just reduce your trading capital to the point that you feel more comfortable and actually start enjoying trading again. If you are not enjoying trading, then why do it?!
If you are not willing to reduce your trading capital, I suggest you ask yourself why. You may find that you are being emotional and not thinking logically!
Ask yourself, 'if I were to lose my trading account today, how would I feel?'. If the answer is emotional, then you are simply trading with too much capital.
Reduce your position sizing - risking too much per trade is another way to crank up those trading emotions.
A single trade or a series of trades should never be make or break. Risking anywhere between 0.1% and 1.0% per trade will enable to keep your account balance healthy, even after several losing trades.
Generally, when someone is risking too much per trade, they end-up glued to their charts and worried about the outcome of the position. If this is you, then reduce your position sizing!
Reducing your trading capital and position sizing will really help reduce stress and other negative trading emotions.
Focus on percentage returns, rather than monetary gain - as already mentioned, there is an undeniable emotional attachment to money. Because of this, it's so much better to focus on your percentage return than monetary return.
Looking at performance by percentage is also much more professional and will help you gauge how much you will need to actually make a decent income through trading.
Being able to state that 'I make 40% per year' or 'I can double my account each year' is so much more meaningful and precise than 'I made £10,000 last year'. The latter tells nothing.
Stick with the strategy and don't expect to make money - too many traders value their success by the amount of money they have made. Once again, focusing on the cash side of things leads to more intense emotions.
Instead of focusing on the money side of trading, focus on your strategy - the thing that gives you an edge.
Your success should be valued in your ability to stick with your trading strategy, not how much money you make (or lose).
Funnily enough, sticking to your strategy will lead to greater monetary returns. So if you really want to make trading work for you, then put your energy into following your strategy rather than the money you are making.
Think longer-term - this is a BIG one...
How often do you check your account balance? How often do you review your performance? Most unsuccessful traders check these things on a daily basis. "How much money have I made today?", they ask themselves. This mindset is totally wrong and extremely unprofessional.
Profitable traders focus on the long-term. They are interested in their performance on a quarterly and yearly basis - not daily or weekly.
Do yourself a big favour. Ease the pressure on yourself by trying to be profitable this year, not this week!
Make trading a money making hobby or 2nd income - another way to reduce trading pressure is to make trading a hobby or a small 2nd income. Trying to trade for a living adds unnecessary pressure and emotion to newer traders. It is a sure way to make trading become stressful.
Keep busy - staring at the charts is both a waste of time and an emotional roller coaster. It might be a novelty at first but you will soon realise that it will increase your trading emotions, especially if you have open positions.
I keep myself very busy throughout the day; running love-the-pips, being a technical analyst for a Forex broker, writing blog posts, playing video games, watching YouTube, etc. These things keep my mind occupied and distracted from the charts and my floating profit and loss.
Be committed to your analysis and trading strategies but let yourself become distracted with other things once trades are open. Give time to the things that give you an edge, don't give your time to emotional activities.
Consider longer-term trading - day trading is far more emotional than swing trading.
This doesn't mean that you shouldn't day trade, it just means that you are making trading psychologically harder for yourself.
I personally believe that all new traders should become profitable swing traders before moving into day trading. Just my opinion.
Learn from a professional - here comes the sales pitch...
Obviously it is much more beneficial learning from someone who knows what they are doing, rather than trying to teach yourself. You can save yourself a ton of losing trades, heartache, and time, by simply learning from a trader than can point you in the right direction. Consider what you have learned in this post and how much you could learn by having your own trading coach or mentor.
You can subscribe to my mentor program here.
A cheaper option is my Advanced Price Action course, which covers my trading strategies and content on trading psychology. You can sign-up here.
Expectation - the Root of all Trading Heartache!
One of the biggest ways you can reduce your trading emotions is to change your expectations...
As mentioned earlier in this post, expectation can be the root of your psychological challenges. In fact, if you think about it, you may realise that all your trading emotions are based on having false or unrealistic expectations.
What do you expect from Forex trading? If you are expecting too much, you are always going to be emotional in your trading, as you are trying to reach impossible goals and aspirations.
Let me give you some examples...
1. A trader expects to double his account each month. Because of this, his position sizing is far too large, causing his trading to become very emotional.
2. A trader expects to have a 90% win rate. Because of this, when the win rate is not reached and he is having far more losing trades than expected, he becomes emotional in his trading.
3. A trader doesn't expect to have consecutive losing traders. Guess what? He has consecutive losing trades and becomes emotional.
4. A trader expects this month to be profitable. The month is nearly over and he is not showing a profit. He becomes emotional.
Hopefully these examples are good enough for you to clearly see that at the start of each emotional journey is expectation. Eye opening?
Time for some hard realities about Forex trading...
Your win rate will be around 50%
Making a double digit return each month is as good as it can get
You will have consecutive losing trades
You will have lot's of losing days and weeks
You will even have losing months
Having more realistic trading expectations can significantly reduce the challenges of trading psychology.
Top Quotes by other Traders...
If I can help you master your trading emotions and - in the process - make trading more profitable and less stressful, then my content has not been in vain... I really hope that this post has helped you so far. Perhaps the quotes below will help you further...
Trading Psychology Quote #1
"Trading doesn't just reveal your character, it also builds it if you stay in the game long enough"
Trading Psychology Quote #2
"Money is just something you need in case you do not die tomorrow. Let this be a reminder for you not to obsess over profits and losses. In whatever you do, strive for enjoyment, focus, contentment, humility, openness... Paradoxically (and as an unintended consequence) your trading performance will improve significantly"
Trading Psychology Quote #3
"Trading emotion may result in short-term gains but it will always lead to long-term losses and failure"
Samuel Morton - Actual Forex Trading
Trading Psychology Quote #4
"Trade like you don’t need the money. It takes so much pressure off you"
Your Next Steps...
Thank you so much for reading this post. You can watch and listen to the trading psychology podcast below to learn more. There are also links below to more free Forex trading content, including my trading psychology PDF...
I wish you all the best in your trading
Download my FREE Trading Psychology PDF...