Forex Trading Education Happy Thanksgiving Trading

Role of emotions in trading

If you have been trading for any length of time, you will have become aware of how important a right mindset is in order to achieve trading success. No trading book is complete without a chapter on psychology and how the emotions of ‘Fear’ and ’Greed’ influence trading.

A lot of trading gurus and pundits suggest that you should keep your emotions aside and trade like a robot. Their argument is that emotions cloud good judgement and decision making. I respectfully disagree. For me emotions are a key ingredient to trading and to life in general. Emotions are what make the market. Scientific research has proven that emotions are meant to protect us from danger, so not paying attention to them will expose you to far more risks in trading.

Trading is about decision making, and being accountable for it. There is no passing of the buck up or down the chain, no jargon-full sophisticated explanations for getting out of a bad situation, or finding a scapegoat. In this business you either take a trade, or sit on the sidelines. Once in trade, you manage it by letting it run or book a profit or loss. Every decision you make gets reflected in your P&L and over time in your equity curve. There is no hiding.

Your mindset and outlook towards life in general plays a big role in your trading decisions. There is no doubt a great deal of rational thinking precedes (and often) follows decision making but at the point of making that commitment, it is emotions that drive you to make that decision. There are two fundamental core emotions that drive all decisions – you are either trying to avoid a pain, or seeking a gratification. In trading business these two aspects are referred to as Fear (of losing or missing out) and Greed (of making more) as mentioned earlier.

So how do you manage your emotions in a manner that your decision making isn’t overly clouded by fear or greed? In my opinion the answer lies in allowing yourself to feel the emotions rather than fight them. You need to develop a method of engaging your conscious and subconscious mind to make the decision as objectively as possible. This is possible when you look at the markets as a social game and see your own reflection in other participants.

I would like to share with you a belief system that I have embraced which helps me have the right mindset for my trading activity:

Respect the markets and fellow participants:

All market participants are there for the same reason as you are i.e. to make profits. If you see them as enemies and have a ‘me’ versus ‘them’ mentality it will lead to negative emotions. At any given point the price in any market reflects collective perception of all market participants – respect that, even if isn’t doing what you expected it to. This acceptance helps you to react to what market offers rather than what you ‘think’. It is especially helpful in managing losses.  In my own experience losses trigger further losses. Keeping a balanced mind set after a loss is therefore very crucial and that can come only from having respect for the market and not seeing it as an object of revenge after the loss.

Develop a sense of gratitude

Having a sense of gratitude towards all you have keeps you grounded and in a positive state of mind. If you look around yourself you will find so much to thank for, the comforts of your home, your family. The facilities you have access to – electricity, running water, phones, cars, aeroplanes, computers, internet, and list is endless. Pause for a moment and think about all the inventions and effort gone into making these things possible and available for you. Only a few decades ago life wasn’t so convenient especially for retail traders. In a market context, be grateful about the access you have to the markets, the internet and software that powers it, the participants who are willing to take the other side of your trade, and so on. Often we just look at our own contributions and completely ignore what others have contributed and are continuing to contribute for us to lead a normal life.

When you have this sense of gratitude, it not only keeps you clam and grounded, it also helps you develop a feeling of abundance. When you operate with a feeling of abundance, you don’t chase market. You let the market give you the ‘right’ trades. It helps you get rid of the fear of missing out as you know that markets will be here tomorrow, and will offer more opportunities.

Hope this is useful for your trading. If you have any questions or would like to discuss this or any other trading subject, please send me an email at [email protected].

Happy Thanksgiving and Happy trading!


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