Controlling Emotions that Hold you Back

So far, we’ve explored many different aspects of the financial markets and the techniques of trading. But there’s one key component that affects the success of every trade you make, and that’s you.

No matter how strong or level-headed you can be, you are a human being, so you have emotions. And naturally your feelings can influence your thinking and your behaviour as a trader.

Trading is an exciting and absorbing activity that can bring you moments of euphoria when things are going well, while equally it can be psychologically tough if markets turn against you. By understanding the emotions you’re likely to experience at every point in the trading process, you can mentally prepare yourself to handle them effectively. That way, your feelings won’t get in the way of your decision-making or harm your potential profits.

In this course, we’ll look at some of the emotions you may need to deal with when you trade.

Anxiety and Doubt

It’s great to be cautious and considered in your trading, but if your worries are crippling you that’s counter-productive.

The transition to a live trading account after using ‘play’ money in a demo environment is one step that worries some traders. It’s a bit like doing a parachute jump: you’ve learned the theory and done all the preparation, but making that leap still takes courage.

There are, however, things you can do to make it a little less daunting:

• Reflect on the lessons you learned while using the demo account
• Apply the same strategies that brought you success in demo trades
• Follow a trading plan
• Start by trading in small sizes until you feel comfortable
• Use risk-management tools, such as stop-losses

As long as you trade sensibly, use the skills and knowledge you’ve already gained and keep your positions modest, there’s every reason to expect success. Of course you will make mistakes – we all do – but by managing risk carefully you’ll minimise your losses.

Fear of Loss

Another time that you might experience fear is when a position is moving against you and you begin to see a growing loss.

Example

Imagine you’ve bought EUR/USD because your analysis strongly suggests it’s about to rise. You’ve considered the risk involved and set a stop-loss.

However, as time passes the currency pair seems to be stuck in a downtrend. It hasn’t hit your stop, but the rise you predicted remains elusive. You start to feel nervous: should you close the position now and cut your losses? Should you adjust your stop closer?

Before taking any action, ask yourself:

• Was my original analysis flawed?
• Have circumstances affecting this market changed since I opened my trade?
• Did I place my stop at the wrong level?

If everything suggests your original analysis is still valid, and if you’ve positioned your stop correctly to protect yourself against unacceptable loss, there’s no reason to alter or kill your trade. Have confidence in your original judgment and let things play out – your loss could turn into a profit.