How to keep your trading emotions in check


You’ll find that advice in just about every trading book you read. However, it’s much easier said than done. Emotions flow through us no matter what we’re doing, especially in the markets.

Compare the euphoric high of riding a winner to the crushing low of taking a losing trade. For some, the swings between the highs and lows are enough for them to swear off trading forever.

The truth is, it’s almost impossible to take emotions out of trading completely. So instead of turning yourself into a robot, you need to find a better way to manage those emotions. And that all boils down to how you approach your trading in the first place.

In trading, choose your risk management

Emotions in trading can get the best of you if you’re trading more than you can afford to lose. For example, say you had $10,000 in your trading account and decide you’ll go all in on one trade. Of course, you’re going to be nervous!

There’s a big chance you will blow up your entire account with just one trade. Compare that to another trader with the same account size who risks no more than $200–$300 on any single trade.

It will take an incredible string of losses for the second trader to lose just a fraction of their account. That’s hardly enough for them to worry about.

That’s why establishing clear risk management rules before you place your first trade will take a lot of the emotion out of your trading strategy. You need to know precisely how much capital you’re prepared to risk on any trade – and stick to it.

Set realistic goals

Another equally important factor is setting realistic goals. This goes hand in hand with risk management. Too often, new traders come into the markets and set their goals too high. So they let their emotions (mostly greed) get the best of them and chase every move hoping for a big winner.

Inevitably, each trade then becomes a roller coaster ride. Before they know it, they’ve gone through all their funds and are out of the game. And even if they want to start trading again, later on, those significant losses will leave emotional scars.

Instead, I’ve learned from decades in the market that you must do the opposite. Get into the habit of taking lots of little profits as often as possible. Not only does it build your account size (and confidence), but it also helps keep your emotions in check.

For example, if you aim to make a $200 profit per trade, then you’re just not going to get as emotional as you would, betting your whole $10,000 account on a single trade.

But soon, all those $200 profits start to add up – giving your account size a real boost. Then, when you aim to increase your profit target to $300 or $500 per trade, it’ll be less of a big deal. You’ve already trained yourself to take profits off the table regularly.

Now you can put your efforts into constantly refining and improving your trading strategy rather than tying yourself up in knots with each trade. As we’ve seen this year, moments of high volatility can also send us – and the markets – spinning between exuberance and fear.

If we keep our emotions in check, though – and use the next few days and weeks to prepare – this market event could deliver some of the biggest bear market gains yet.

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