Avoid Emotional Trading: Be Happy and Profitable

Emotional trading, more than an approach, is a condition. Moreover, it is a non-physiological condition that can cause some damage to the trader, even leading to significant capital losses. The bad news is that it is a fairly frequent condition, especially among the less experienced. The good news is that it can be somehow avoided or at least managed in a way to limit the damage. In this article, we talk about emotional trading, providing an overview of this condition, specifying the risks it entails, and providing some advice on how to best deal with it.

What is meant by emotional trading

Emotional trading is the condition that pushes the trader to make decisions driven by emotions, influenced by some emotional involvement, rather than rationality (as it should be). When trading is emotional, the investor opens and closes positions by derogating from the rules he has set for himself during the strategy development phase. This phenomenon concerns all components of the trade: from exposure to the sign, from the implementation of precautions such as stop-loss to the identification of the entry and exit point. Derogating from one's trading system is always a risky choice, to be avoided except in limited and specific cases, which have nothing to do with the emotional condition of the Trader.

Why trading can be emotional

The very concept of emotional trading is in contradiction with the stereotype of the trader. The speculative investor is perceived by the collective imagination as a self-confident, cunning, and courageous individual, able to ride the wave and exploit the unexpected. In reality, but this is a bit like Columbus' egg, the trader is simply a man, as he is subject to the psychological pressure that a given situation can exert. In short, the trader can experience situations of high stress. And this stressful condition can affect the quality and even the methods of his trading activity. After all, trading is an almost inherently stressful activity. The fact is that the stakes are always high, as the stakes are simply... Money. Perhaps money earned through a work activity, which therefore cost sweat and effort. Another source of stress is the awareness that the destinies of trading activities depend solely and exclusively on oneself. Realizing this means undergoing a certain pressure. Stress is equivalent to saying emotionality. By nature, habit, or experience, some are able to resist stress and maintain a state of lucidity even during the most chaotic events. Well, when this lucidity is lacking, we speak of emotional trading.

The dangers of emotional trading

In a sense, we have already introduced the risks of emotional trading. In this paragraph, we will offer a more detailed overview of the consequences of trading driven by emotionality rather than rationality. When we talk about emotional trading, it is inevitable to also talk about emotions. What are the emotions that the trader experiences when the condition of lucidity is lacking? The answer depends on what happened previously, in the most recent phases of the trading activity. Normally, a certain degree of stress is always present. However, for it to be considered emotional trading, it is necessary for the classic spark to ignite, or for the classic last straw to be added. Depending on the nature of this event, the response can go in one direction rather than another. If, for example, the trader has failed an important order, he may be driven by a feeling of retaliation, perhaps exacerbated by a hint of desperation. He feels compelled to make up for the damage as soon as possible, experiences a certain anxiety, and therefore indulges in imprudent, hasty choices. The event, however, can also be of a positive nature. Let's imagine a trader who, perhaps after a few defeats, finally lands a few orders. Let's assume that the winning trades are more than one. Here, feelings of euphoria emerge, if not even omnipotence. In any case, the trader indulges in an overestimation of his potential. Again, he derogates from the rules he set for himself and engages in activities that have nothing to do with the prudential approach befitting a rational trader. All these situations lead to similar consequences. Whether the trader experiences negative feelings or is involved in positive feelings, if he allows himself to be overwhelmed by the latter, he inevitably makes even glaring mistakes, engages in losing trades, and leaves a good part of his capital on the field. But the damage is not only economic. The risk is that a vicious circle is established in which the trader progressively and constantly loses his self-esteem, until he reaches a condition similar to paralysis. The final stage of this process is the definitive abandonment of trading activity.

Solutions to the problem

Is it possible to circumvent the problem? Is it possible to avert the condition of emotional trading? The answer is yes, although it is not at all simple. Firstly, because this phenomenon is simply a reaction of the human psyche, a component that is by definition hardly controllable. Secondly, because in trading everything works against a resolution of the problem. As already mentioned, trading activity is stressful and it is so by its very constitution. The trader, therefore, finds himself having to find his stability while the storm is in progress, an objectively complicated mission. The complexity is demonstrated by a dynamic, certainly not corroborated by numbers (there are no studies on the subject) but well demonstrated by the experience and testimonies of many Traders. The dropout rate among speculative investors, regardless of the reference market, is quite high: in essence, those who start trading tend to throw in the towel within a rather short period of time. Obviously, we are not talking about all beginners, but a good part of them. The reason for the tendency to abandon is precisely the inability to escape emotional trading, or more properly the difficulties encountered in managing emotions. As already mentioned, however, there are solutions to the emotional problem. Solutions that are not easy to implement, but which nevertheless represent a resource for those who are susceptible to this type of condition, for those who struggle to keep emotions in check and to withstand psychological pressure, both in good and bad fortune. Solutions that are certainly difficult but effective. It is sufficient to ask experienced traders, who have certainly solved the problem long ago, to understand that these solutions are the only ones that can somehow save the situation or at least make the effects far from irreversible.

What are these solutions?

First of all, it is necessary for the trader to act on himself and undertake a path of emotional management even outside of trading activity. It is a matter of undergoing a sort of emotional training, an exploration of the self that is certainly complicated and at times painful, but which is useful in all areas of life, from professions to relationships to everyday life. It is not a matter of going to a psychologist, although in the most extreme cases, disproportionate reactions to the stresses of trading are also due to problems of this type. It is a matter of creating a connection with oneself, of being able to listen to and understand one's feelings. One can only fight what one knows, even if it is the most emotional and visceral version of oneself. Some find relief in periods of relaxation, perhaps to be spent reflecting on themselves and the difficulties they encounter. Others benefit from slightly more complex approaches, although of a decidedly exotic nature. The reference, among other things, is to mindfulness, a set of meditative techniques that are very fashionable at the moment, and which many swear to be effective for not only re-establishing contact with oneself but also for modifying the way in which problems are managed and adversity is faced. What can be done instead from a practical point of view? What should a trader do who senses a certain emotional upheaval and intuits that the condition in which he finds himself can harm the effectiveness of his trading activity? In reality, there is not much he can do, if he has not solved the problem at the root. However, a wise choice could be, very simply, to suspend the investment activity. It is a matter of setting up a strategic retreat, but also of recognizing one's limits when they become apparent and threaten to produce negative consequences.