Can your psychology really get in the way of potential profits?

TLDR; for short term traders we aim to outline how emotions can alter your strategy, and having greater control over them can help your portfolio grow.

I’ve been guilty of letting my emotions get in the way of trading, only to tell myself I wish I held longer or sold sooner. Whenever I hear myself saying that, I know I let my emotions control my decision making rather than the data I used to make the decision. 

Below is an example of how we let our emotions get the best of us. This was a recent profitable trade but emotions got the best here and we let it go, disregarding the data we had. On this trade we made $5 (+0.87% gain) over a possible 700% return. We wouldn’t hold for that long but we definitely could have made more than 0.87% of this trade.

Some of the most common emotions that can affect traders include:

• Fear: Fear can lead traders to make poor decisions, such as selling a winning trade too early or holding onto a losing trade for too long. This also includes fear of missing out or FOMO of not being in a trade and forcing it to try to capture a wave up or down.

• Greed: Greed can lead traders to take on too much risk, such as overtrading or using too much leverage to oversize your position. During these times you tend to focus more on the profit and loss of the trade which can be jarring especially if you are a short term trader.

  • A baseball analogy, try to aim for singles and double vs hitting a homerun on every trade

• Hope: Hope can lead traders to ignore warning signs, such as a losing trade that is not reversing, staying in a trade too long watching the trade yo-yo up and down just to go in the direction you didn’t want.

  • Use the data to make decisions

• Regret: Regret can lead traders to make revenge trades, which are often based on emotion rather than logic

  • Don’t think about your last trade, each trade should be handled independently

To be successful traders, it is important to be aware of these emotions and to develop strategies for managing them. Some tips for managing emotions include:

• Develop a trading plan and stick to it. A trading plan will help you to make decisions based on logic rather than emotion

  • Personally, I try to take 20%, and then set stop losses at that 20% mark, this way you come winning something

• Set stop losses and take profits. Stop losses will help you to limit losses, while taking profits will help you to lock in gains.

• Take breaks when you need them. We are all surrounded by screens in our daily lives, a little screen-off time will help re-calibrate your thinking. If you are feeling emotional, it is best to take a break from trading and come back to it when you have calmed down.

• Don't trade with money you can't afford to lose. This will help to reduce the amount of emotional stress you experience when trading. Losing is inevitable part of the game. There is no perfect trader who wins all the time. 

Trading psychology is an important part of trading success. By understanding your emotions and developing strategies for managing them, you can increase your chances of making profitable trades.

Here are some additional tips for improving your trading psychology:

• Get to know yourself. What are your strengths and weaknesses? What are your triggers? The more you know about yourself, the better equipped you will be to manage your emotions.

• Practice mindfulness. Mindfulness is the practice of paying attention to the present moment without judgment. It can help you to stay calm and focused when trading.

• Seek professional help. If you are struggling to manage your emotions, it may be helpful to seek professional help from a therapist or counselor.

Trading psychology is a complex and ever-evolving field. By taking the time to learn about your emotions and develop strategies for managing them, you can increase your chances of success in the markets.

If you have any questions about trading psychology or tips you have used, we’d love to hear about them.