How can basic human emotions make us forget trading mechanics and strategies?
In this part we will be talking about basic human emotions that can have a huge negative impact on our trading endeavours. But more importantly we will be discussing how can we overcome that and turn that into our favour.
These basic emotions can destroy your clarity of thinking which leads to wrong decision making. As Tony Robbin says, Decisions shape our destiny. But in the Financial Markets only strategical decisions can benefit you the most.
Let’s talk about some of the basic emotions that can lead us to wrong decision making.
- Emotions of Anger: In the world of Financial Markets, no one can ever get 100% success ratio. We are bound to lose money in some trades. But for some of us losing money can make us furious for making bad decisions. And then we often try to ignore the technicalities and try to recover our loss as quick as possible and that’s when this emotion of anger starts to have a negative impact on our decisions and on our trading results.
- Emotions of Regret: We all hate missing out on opportunities (especially money making ones) and funnily enough, we are the reason why we miss out. We miss out on these opportunities by not taking action i.e sitting on the fence. And when an opportunity turns out great, then we regret why we didn’t take the opportunity. In that situation we make irrational decisions and get involved so we won’t miss out again but often when we trade without following any strategy we occur major losses.
- Emotions of Attachment (Sentimentality): Let’s suppose we like to trade on a currency pair EUR/USD and most of the time we execute our trade in the mornings and we get good results /make profits. Often we think that this pair never fails and you will always make profits when trading on this pair. In my long career of Financial trading I have witnessed that this emotion of attachment can make people over confident. We often start to do reckless trading. As a result we forget the merits and basic strategy we learned in the first place.
- Personal Circumstances (Emotions of Stress): In times of our life, some event’s happen which are totally out of our control and no matter what we do we can’t think straight. That often happens when something goes wrong in our personal life. Such as major illness in the family, disturbance in the family life etc. You should take a clean break from trading for few days up until a few weeks because in that situation no matter how strong you are, you cannot give your undivided attention to trading. Unfortunately you can only get great results from your trading activities when you’re completely committed and without any distractions.
You can only do a few things to turn it all around in your favour
- When you feel you are angry and have lost money trading the markets, there is not a lot you can do about losing trades. However you can prepare yourself for the future and not to repeat the same mistake again. I often write down my mistakes and hang it somewhere where I can see it every day so it will be a constant reminder that in that situation I should only be getting involved in the markets when I am in right state of mind so I don’t pay the same price again.
- Every time you feel that you have missed an opportunity simply look at the strategy/proven formula that you are following and wait for the right time and only trade when you’re trading criteria meets your merits of your trading strategy.
- When you feel that one Financial instrument had produced great results for days/weeks but then suddenly you have more losing trades then profitable ones then you should review the complete criteria of your trade execution (around what times and what days it had been most successful and simply go back to basics and study your strategy once more)
In a nutshell these basic emotions can have a negative impact on our trading activities. As we all have heard it before that financial trading is an emotional game.
I believe we can only win this game when we have a very specific mind-set and by carrying daily disciplined habits we all can certainly achieve that mind-set!