Controlling emotions that entice you to trade
While some emotions may make you hesitate to trade, others can have the opposite effect, causing you to act when you really shouldn't.
Rather than being paralysed by nerves, some new traders have a quite different reaction and can't wait to jump into the markets. This can be even more damaging.
As the saying goes, 'a little knowledge is a dangerous thing', and launching yourself into a trade before you're fully prepared is a sure route to disappointment. First consider this checklist:
Are you ready to trade?
- Are you comfortable using your trading platform and do you know how to apply the tools it provides?
- Have you created a trading plan?
- Do you fully understand all the factors currently affecting the market you want to trade?
- Have you planned your trade, considered your objectives and calculated the potential profit and loss?
If you can answer 'yes' to all of these questions, and if your proposed trade fits your trading plan, you're ready to go.
Similarly, exercise restraint when it comes to open positions. After entering a trade, you should give the market time to react as you expect it to - don't get impatient and trade out before the market has had time to move.
Temptation and greed
When your trades are going well, it's only natural to be excited about the potential for even greater gains.
But at these moments it's vital to stick to the rules of your trading plan. If the signs indicate it's time to close a trade and take your profit, it's probably not a good idea to keep holding on in the hope of making even more money.
The same goes when you see an enticing opportunity to trade. Suppose you know an experienced trader who tells you he thinks Trendy Online Retail Group plc is about to see a surge in its share price. You might be tempted to place a large trade, even if it goes against your trading plan.
But it's important to remind yourself that your plan is there for a reason: to take the emotion out of trading decisions. If the risk posed by this trade is outside the parameters you would normally consider, you should decline to get involved - however convinced your friend may be.
Happiness and pride
When a trade goes well, you're likely to feel a surge of pleasure and satisfaction. Naturally you'll be proud of your achievement. And if a series of trades all turn a profit, you may even start to feel invincible.
These emotions, although positive, can also be dangerous. At times like this, irrepressible optimism can set in, encouraging you to take risks that would normally be outside your comfort zone.
We humans tend to see patterns in everything, so a sequence of successful trades may convince you that you're 'on a winning streak'. However, remember the universe doesn't work that way: your next trade could just as easily result in a loss, so if you over-commit yourself you could be in for a painful shock.
Always be aware of the way your mood is affecting your trading decisions. By controlling your excitement and staying calm you're more likely to think clearly and make informed, prudent choices.
- Sensible restraint is vital. Don't trade impulsively without really knowing what you're getting yourself into
- If an opportunity doesn't fit your personal trading plan, say 'no'
- Don't allow success to go to your head. Enjoy your achievements, but stick to your trading strategy
Controlling emotions that hold you back4 min
Controlling emotions that entice you to trade4 min
Controlling emotions that cloud your judgment5 min
Developing an unbiased, positive approach4 min
Common trading mistakes: part one6 min
Common trading mistakes: part two5 min
Common trading mistakes: part three7 min