Forex Trade

Emotions in Trading

A trading environment is a fast-paced space with many opportunities but with equally as many potential pitfalls. With research suggesting that around 80% of traders will lose money and just a small 1% will go ahead and achieve profitability on a long-term basis, the probability of not making it as a successful trader run far higher than what would normally be considered a sensible move.

Why would you even consider jumping into something where the odds are stacked so highly against you? If these were a business and it had an 80% chance of failing most would run mile. Yet so many traders do get involved despite knowing that the odds are most certainty no in their favour. Why?

One of the principal reasons is the rewards that successful trading can bring, not just in monetary terms but also the independence, satisfaction and potential of branching out on your own in a financially self-sufficient nature. The allure of these benefits, enjoyed by those successful few, is sufficient to draw in the crowds.

So whilst the odds are clearly stacked against traders, the possibility of success does exist. Just through simple research of the trading industry you can quickly come across stories and profiles of successful traders, who rapidly grew small initial sums in to large fortunes.

Those that do trade successfully do so because they have found “an edge”, something which helps them consistently beat the market. That “edge” almost always comes down to how well a trader manages their emotions when trading.  The way that a trader responds during a period of market adversity which could be uncomfortable for the trader is crucial.

Market behaviour and the two principal emotions which will influence a trader’s decisions are fear and greed. 

Fear and Greed

Fear can be a performance inhibitor in trading. Fear of losing is one of the biggest reasons that some traders never even get off the ground. This striving for perfectionism can mean that a trader never progresses past the demo account stage.

Greed – as success in trading is measured in monetary terms, i.e how much you earn. Greed is therefore a focus on money, earning more. Greed can result in a number of practices which are detrimental to trading. Perhaps the most common is overtrading, whereby the want to earn more puts the trader on an impulsive path as they chase profits or attempt to make up losses.

Greed can also encourage a path of more excessive risk taking. This sees traders taking much larger positions than they would normally consider of even turning a blind eye to money management in a bid to make more.

The less that emotions entre your trading the more likely you are to succeed. The best way to do this is to make a comprehensive trading plan and then stick to it. The plan is put together when the trader is calm and rational, without the fear and greed emotions that surface when a trade is open and drive emotional trading. A comprehensive trading plan is an absolute must to become a successful trader and can help traders achieve that edge that pushes them ahead of the rest.

About the author