7 tips to avoid emotional trading

7 tips to avoid emotional trading

1. Identify your personality traits
2. Develop and follow a trading plan
3. Have patience
4. Be adaptive
5. Take a break after a loss
6. Accept your winnings
7. Keep a trading log

Identify your personality traits

One of the keys to developing successful trading psychology is identifying your personality traits early on. You will need to be honest with yourself and say if you have impulsive tendencies or if you are prone to acting out of anger or frustration.

If this is the case, it is important to keep these traits in check while you are actively trading because they can lead you to make rash and ill-advised decisions that have little analytical backing. However, it is also important to play to your personal strengths. For instance, if you are naturally calm and calculated, you can take advantage of these personality traits during your time on the markets.

Equally as important as identifying and being aware of your personality traits and emotions is recognising your biases. Biases are an innate aspect of human nature, but you should be aware of what your individual biases are before opening or closing any trades.

Develop and follow a trading plan

Having a trading plan is paramount to helping ensure you achieve your goals. A trading plan acts as the blueprint to your trading, and it should highlight your time commitments, your available trading funds, your risk-reward ratio and a trading strategy you feel comfortable with.

For instance, a trading plan could say you were going to commit one hour every morning and evening to trading, and that you will never commit more than 2% of the total value of your portfolio to any one trade. This can help minimise losses and limit the effect of emotions on your trading as the rules for opening or closing a position are already highlighted for you.

Trading plans should also take into account individual factors that could affect your trading discipline such as your emotions, biases and personality traits. If you make clear what your biases are before you start trading, you might be less inclined to act on them.

Have patience

Patience is integral to discipline, and it’s crucial you have patience with your positions. Acting on emotions like fear can lead you to miss out on a profit by closing a position too early. Trust your analysis and remain patient and disciplined. Equally, when looking to enter a trade, it’s important to be patient and wait for the opportune moment rather than just jumping into a trade right then and there.

For instance, if you were wanting to speculate on some GBP currency pairs like EUR/GBP or GBP/USD, you may want to wait until just before a Reserve Bank announcement as there tends to be increased volatility at this time.

Be adaptive

While it’s important to have a trading plan, remember that no two days on the markets are the same, and winning streaks don’t exist in trading. With this in mind, you should become comfortable in assessing how the markets change from day to day and adapt accordingly.

If there’s more volatility on one day compared to the day before and the markets are moving particularly unpredictably, you may decide to put your trading activity on hold until you’re sure you understand what’s happening. Being adaptive can help to limit your emotions and rule out representative and status quo biases, enabling you to assess each situation on its own merits – helping to ensure you’re pragmatic during your time on the markets.

Take a break after a loss

Sometimes after a loss, the best thing you can do is walk away from your trading account for a short while to gather your thoughts and compose yourself – rather than rushing into another trade in an attempt to regain some of your losses.

The best traders are those that take their losses and use them as learning opportunities. They will typically take a few minutes to themselves before going back to their platform, using this time to assess what went wrong for that particular trade in the hope they might avoid making the same mistake in the future.

By doing so, they keep emotions like pride or fear in check by letting themselves cool off before approaching the next trade with a clear head and sound judgment.

Accept your winnings

Just as important as taking a break after a loss is to quit while you’re ahead and take your winnings. A succession of wins or one particularly big win can make you feel invincible, and you could subsequently rush into another position to try and do it all over again.

You might even open a succession of new positions in the belief that none of them will fail because today is ‘your day’ on the markets. This could cause you to take unnecessary risks or diversify your portfolio too quickly without doing analysis into each of the respective markets.

Happiness can be just as dangerous as anger during your time on the markets and, as such, it’s important to recognise when it might be impairing your decision making or could be having a negative impact on your trading psychology.

Keep a trading log

A trading log will enable you to record all your losses and wins, as well as the emotions that you were experiencing during that particular trade. Your trading log can be used to assess whether what you did at any one point in time turned out to be a good decision or not.

For instance, a trading log can be used to record a time when you chose to cut your losses and the eventual price that the asset hit. By doing this, you can see if you made the right decision or not. Equally, it can be used to record when you accepted your winnings and if your emotions played a role in whether you chose to close that position too early or too late.