How can traders improve their ability to manage emotions and stay calm under pressure?
The most influential factor in trader success or failure is the ability to manage emotions. The inability to keep fear and greed in check can lead to financial and psychological devastation. After all, speculation is not a 9-to-5 venture in which traders are paid to show up for work. It is performance based; the capacity to produce income is contingent on the ability to function efficiently and behave logically.
Emotional traders are more likely to make poor decisions driven by revenge rather than analysis. Such a mindset can lead to overzealous trading, excessive risk taking, and a disregard for the intended strategy.
Unfortunately, the ability to stay calm in both good and bad times is difficult to learn. Those who have mastered the art were probably born with a chunk of their proficiency, with the rest earned through experience.
Confidence gives traders the courage to pull the trigger on a trade entry once their strategy deems it appropriate; it can also prevent panic should the market fail to behave as predicted. Not unlike a basketball player who can’t get shots to fall into the basket when he lacks confidence, traders will often find a strategy that worked for them previously fall short due to ill-advised adjustments to the proven game plan.
A great way of increasing confidence is to take a few quick profits. Obviously, this is easier said than done, but finding high-probability, low-risk trades such as deep out-of-the-money short option strangles in a market with high-volatility levels is usually a good place to look. Or if you are a futures trader, you might look for a few positive in-and-out scalps — using your entry strategy, of course.
Pay attention to your health
This is often overlooked by traders. If you are a full-time trader or any type of professional sitting at a desk all day, your body isn’t getting the physical activity it needs. Believe it or not, taking up a hobby such as jogging or hiking might improve your trading results.
According to the Mayo Clinic, “Physical activity stimulates various brain chemicals that may leave you feeling happier and more relaxed.” Other studies suggest regular exercise promotes healthy sleep habits and self-esteem, relieves stress, and improves learning capabilities; each can be beneficial for performance-based tasks such as trading.
Do your homework
Regardless of how much you paid for a trading signal service provider, market newsletter, or mentor, don’t put too much faith into marketing gurus. When it comes to trading, we are all in the same boat; we are attempting to beat the market through speculation and are vulnerable to being wrong. Access to unlimited sources of fundamental information and years of experience with technical analysis might give someone an advantage, but there are never any guarantees.
Each trade you execute should be based on your own research and ideas. If you are going to follow a market guru, use his or her advice in conjunction with your analysis.
Entering a trade solely on the recommendation of someone else could leave the door open for excessive losses. On the other hand, traders with lower risk tolerance might find themselves panicking over small losses after entering a trade that was not personally confirmed.
Don’t be afraid to take time off
Trading several contracts at the same time immediately multiplies the tension that comes with speculating in futures and options. The quickest way to manage emotions is to trade fewer at once. You might think that this automatically equals fewer profits, but that isn’t necessarily true. A $50 profit each trading day is equal to about $12,000 annually; it is likely easier to net $50 trading one contract than it would be trading 10. Similarly, traders who wait for the high-probability trades based on their strategy will do wonders to avoid undue stress, which is the leading cause of poor trading decisions.
If you find yourself straying from the intended strategy, become emotionally attached to a position, or are incurring unnecessary losses, stop trading. The markets will be there when you are in a better frame of mind. Don’t think of it as missing profitable opportunities; instead, it is a matter of preserving capital.
Play the odds
Perhaps the most efficient behavior in reducing the emotional toll of trading is to accept the fact that you will be wrong — a lot. The key to successful trading is placing the odds in your favor, but that isn’t always enough.
In the end, markets will do what they do, regardless of what our seasonal statistics or fundamental analysis tells us they should. This realization will help mitigate the impact that losses on current trades will have on future ones.