TheRiskBlog

We all know - or should know - that it affects us negatively when we make a trading decision while we’re in a highly emotional state. And we are told that we should “trade without emotions”.
But does that mean we should become emotionless computers?  That we should only decide because of calculations?

Not exactly

It rather means that we try not to get overwhelmed by our feelings, especially while trading or making important decisions. Such distracting feelings can be for example:
Anger
(E.g. about negative investments or because of an argument you had with somebody)
Euphoria
(E.g. about positive investments or because you feel happy about a joyous event in your live)
Fear
(E.g. about losing money or the fear of being left by the person you love)

The origin of a certain feeling doesn’t have to be related with trading, but it will influence it. As a human being, you bring your feelings with you when you sit down to trade. But whatever the cause of your fear, anger or euphoria is, don’t fight it or ignore it. Because if you do so, the emotion - now trapped deep inside you- could affect your state of mind even in a more crucial manner than before.

The best method to handle positive, as well as negative emotions is to find a way to canalize them. It is important to reach a balanced state of mind.
Some achieve this through meditation or they relax while hearing classical music. Others seek the companion of people and have some leisure time with them. Or they find mental balance in their hobbies – e.g.: sports, model making, painting.

So, now imagine having two traders with similar skills: Trader A and Trader B.
They trade the same markets daily, undergo the same ups and downs, their strategies don’t differ much and they both have a good risk-management.

BUT – While trader B tends to be overwhelmed by his feelings, when he loses, he has a worse track record than Trader A. If a day is quite flat or if he had some losing trades, he begins to get nervous and reacts to this by overtrading. Ignoring some of his trading-rules, he doesn’t realize that staying calm and letting the market find its direction before entering more trades, would be the best strategy.

Trader A experiences the same flat day in the market. But unlike trader B, he stays calm. He doesn’t get overwhelmed by fear or anger about the lost money. He knows how to deal with his emotions and how to canalize them. Twice a week he practices boxing to clear his mind, he meets other people and has a quite optimistic view of life. And if a negative situation suddenly arises, he is able to evaluate and handle it.
He can do this not because he’s more talented than trader B, but he has discovered that a balanced mind is very useful and important for his trading success.

So if you tend to become hectic and become  emotionally involved too much, don’t ignore this fact. This is a part of you and it makes more sense to learn how to handle these feelings. Then- if you’re balanced, your trades become more balanced, too.