Managing emotions and mastering inner psychology is usually the biggest challenge for most traders. Having an effective strategy is one thing but executing it without letting your emotions sabotage your trades can be difficult.
To become a consistent trader you need to master self-awareness and discipline. The first step towards improving your trades is identifying the inner demons that get in your way.
#1: FEAR
Fear is a trader’s worst enemy, it will do everything it can to steer you away from your plan and sabotage your trades. The fear of loss will cause you to overanalyze the markets and meddle with your trades.
Common trading mistakes caused by fear of loss:
Hesitating when you should act
Cutting profits short
A failure to execute your plan
Panic selling at the bottom
Obsessing over every little tick on the charts
Solution: Manage risk by accepting how much money you’re willing to lose before executing a trade. Not every trade can be a winner but if you have a solid strategy then your winners will far outweigh the losers.
The fear of missing out is another inner demon that must be dealt with. It will try and seduce you into chasing hype and shovelling money into a market that’s already been pumping. If you succumb to the temptation of chasing the markets then chances are you’ll end up buying a top as the price turns against you.
Solution: If you’ve missed an opportunity then instead of agonizing over it, go hunt for a good trade in another market. Be ok with the fact that you can’t catch them all.
#2: IMPATIENCE
Patience is the secret ingredient to successful trading. A cat stalks its prey patiently and waits for the perfect moment to strike. You must be patient and wait till the right opportunity presents itself. Sometimes the best trade is no trade.
People who overtrade the markets usually end up losing money. In most situations you have a 50/50 probability and good traders wait for market inefficiencies that give better odds.
Sometimes impatience will cause you to exit a perfectly good trade before following your plan through till the end. There are times when a swing trade can actually take months before you see the anticipated results.
Solution: Have a trading plan and execute it from start to finish. While setting your plan identify your entry, exit, stop-loss and how long you’re willing to hold the trade for. Develop the habit of trading quality over quantity.
#3: REGRET
Trader’s can sometimes beat themselves up emotionally over taking a loss or missing out on an opportunity. It’s not possible to execute every single trade with absolute perfection. You may not nail the exact tops and bottoms. You’re also bound to make mistakes from time to time.
Regret will reinforce all your negative fears and cause you to doubt your trading abilities. This can lead to a downward spiral of toxic thinking that can cloud your judgement.
Solution: If you make a mistake then do your best to learn from it. Recapitulate your trades, identify how you can improve and then let it go. If you find yourself angry and stressed out then it’s time to take a break until you cool off.