Managing Emotions in Trading: Psychological Tips for Success
April 11, 2023
Emotions in Trading can be a problem if not managed properly. The verb "manage" is not accidental: emotions can only be kept in check, they cannot be removed. After all, the stakes are always high, and the trader is obviously a human being.
In this brief but comprehensive guide, we discuss emotions in trading and provide some tips for managing them. The tips will be both psychological, or rather philosophical, and practical in nature.
Why Emotions in Trading Are a Problem
So, why do emotions in trading risk causing problems? The reason is simple: they reduce clarity, leaving less room for rationality. Especially because these emotions are strong, for better or worse. Trading is a potentially very profitable activity, but also risky, especially if carried out at speculative levels. What's at stake is money, perhaps accumulated through hard work.
The truth, however disheartening, is that emotions in trading cannot be erased. It is in human nature to feel something while performing actions with important implications, even if merely economic.
Another truth, far less obvious, is that it's not only negative emotions that do harm, which arise from the prospect of failure, but also positive ones.
Failing one investment after another can lead to discouragement, paralysis, anxiety, and fear. It can also lead to recklessness if associated with the desire to recover as quickly as possible what has been lost. These basic emotions make trading less efficient, leaving less room for analysis, reflection, and the ability to understand the market.
However, similar dynamics also emerge when "everything is going well." In this case, euphoria, the desire to earn as much as possible, and excessive self-confidence take over. Another typical emotion of traders going through a positive period is what the Greeks called "hybris," which could be defined as proud arrogance.
In this case, too, trading loses its scientific nature and takes on the contours of gambling. It only takes a moment to go from the stars to the stables, with the risk of experiencing equally strong and negative emotions, and entering a very dangerous vicious circle.
Some Tips for Managing Emotions in Trading
Fortunately, a solution exists, however difficult it may be to adopt, at least for beginners. This solution consists of managing one's emotions. They are not suppressed, they are simply put in a position where they cannot harm, where they cannot impact trading activity.
How to do it? Here we present some approaches, which are both psycho-philosophical and technical.
Knowing Yourself
The first step in managing emotions in trading is knowing yourself. We are all prone to emotions, but some more than others. Above all, each in their own way. Some are prone to anger, some to fear and anxiety, some to arrogance.
In this context, knowing yourself means knowing your enemy, having full awareness of the emotions that, during trading, you will find yourself facing.
Now, it's unlikely that those about to invest don't have a solid self-knowledge. However, an extra effort is needed to foresee the reactions of your self in the face of the difficulties that, in a very specific way, the investment activity poses. It is, in a sense, a matter of simulating in your mind the worst scenarios, or at least the most dangerous ones.
Reducing Space for Emotions
Once this internal work is done, all that remains is to implement practical solutions to maximize what has been learned. The categorical imperative is "reduce the space for emotions." If they cannot be suppressed, then it is better to cage them.
How to do it? In theory, it is quite simple: putting on the autopilot right when emotions risk erupting, emerging with greater force. That is, in the operational phase. In this sense, it is essential to use a precise trading strategy that indicates exactly the path to follow based on the conditions that occur in the market.
In this way, the decision-making work is carried out in a previous phase, with a cool head. Thus, precisely in the most heated phases, emotions cannot exert any impact, precisely because there is nothing to decide, there are no decisions to be made and potentially subject to the irrationality of emotions.
Sharing Testimonies
Reducing space for emotions is easy only in words. Even when the "table is set," there is always the temptation to take the situation back into your own hands and, driven by emotion, try to intervene directly. It is inevitable that a certain work on oneself must be done. It is necessary to find within oneself the strength needed to resist the emotional drive.
One way to find it is to share one's experience with traders of equal rank and, perhaps, with someone a little more experienced, who has already gone through this phase and can therefore advise, motivate, represent a reference and a benchmark.
Hence the need to attend trader communities, a possibility also made available by many brokers. This is a useful move also from a technical perspective, as dialogue also means exchanging ideas, strategies, and advice.
