Investment Psychology: Emotion Free Trading
Investor Psychology - Is Emotion Free Trading Truly Possible?
Are your emotions constantly tossed up and down on the waves of the financial markets? Do you go from heart-pounding anxiety to light-headed elation in moments? Do you get emotionally exhausted from riding the ups and downs of the financial markets?
Traders both experienced and inexperienced have gone through this roller coaster ride of emotional ups and downs. To say that it becomes easier over time isn’t really true. Perhaps one might be able to push the emotional buzz into the background, but the emotional stress does exist.
Over the longer term, this constant emotional stress takes its toll both on the mind, body and relationships with friends, family and peers. Who really enjoys being with someone who’s on the edge majority of the time?
The question that needs to be asked is:
“How Do I Reach The Stage of Emotion-Free Trading?”
Is emotion-free trading truly possible in the first place?
The Causes of Emotional Stress In Trading
There are several causes of emotional stress in trading, several which have to deal with the ego of the trader. The major cause, however, is usually because we are dealing with something that is linked so closely to the basic livelihood and social standing of life in modern society. The need for money.
Trading is a tough game because many traders come in with the wrong expectations. Some traders are desperate for a way out of their financial difficulties, others jump into trading expecting it to save them from their dreary 9 – 5 jobs. Others still enter trading because they want some “excitement” in their lives.
Trading gets easier and more “Zen-like” not because of the trader’s ability to tune out the emotional stress, but because of applying the proper approach and strategies towards trading the market.
What do I mean?
Example: Trading For A Living
When you are trading for income, and you have $50,000 as your trading capital. You’ve done your calculations, and expect to survive on $2,000 a month while building your trading capital. In order to do so, you expect to generate 6% a month on your $50,000, resulting in $3,000 in total profits.
While achieving 6% a month is possible, sustaining 6% and more on a consistent basis for an inexperienced trader is highly unlikely.
Possible things happening are:
- Taking on too much risk per trade.
Most inexperienced traders don’t fully comprehend the implications of going on a losing streak, which will happen sooner or later in their trading career.
By risking a mere 5% of their capital per trade, a losing streak of 4 trades in a row could result in wiping 20% of their $50,000 out.
That’s $10,000 gone!
With a remaining capital of $40,000 generating 6% a month, that would now result in $2,400 a month. That’s $600 less than the “expected” $3,000 per month trading profits.
And that’s providing that the trader can even consistently generate 6% a month, every month!
- Being totally consumed with trading to the exclusion of all else
For a trader beginning their path of learning how to trade, no doubt it’s very useful to reach a state of total immersion to learn the necessary trading knowledge and skills.
However, some traders are so totally consumed by trading they stop living life. They stare at every single tick of the market, read up on every single latest news event happening and watch the financial reports on the media. In a sentence, they live, breathe, eat and sleep the financial markets.
If their positions are positive, life is great and couldn’t be better. If their positions go negative, it becomes the “end of the world”.
Combined with over optimistic expectations, over-aggressive trading risk, lack of a working knowledge of trading strategies and systems, all combined in one way or other, result in emotional stress.
Trading Psychology - What’s The Solution?
The solution is simple once you understand it. If you know what the factors that cause you emotional stress are, reduce or remove these factors as much as possible!
If your lifestyle requires $2,000 per month or more, don’t expect to jump in feet-first into trading and make that much a month with a limited trading capital. Do your homework, plan your finances, and then steadily make your transition into trading.
The forex markets are open 24 hours, and if you’re really serious about trading for a living, then invest that extra time after work to learn how to trade properly.
It’s also important to have a life outside of trading, because trading can be so seductive that it consumes traders to the exclusion of all else. With a life outside of trading, it helps you to keep trading in the proper perspective and allows you to better handle the emotions that come with winning and losing in the markets.
There’s one common statement that many experienced traders make when they look back on their career. It’s the wish that they had “paper-traded” a lot more, and got a proper education for trading before they jumped in with real money.
Then again, hindsight is always 20-20. But you don’t have to learn from your mistakes. Learn from the mistakes of others.