As you become a better trader, you will undoubtedly encounter losses that cause anger and frustration. These feelings are not only unpleasant but can also negatively affect your decision-making process. Traders need to develop methods of dealing with these negative emotions when they occur or risk ‘blowing up’ their accounts within the first few months of active trading.
Negative emotions experienced when trading
When trading stocks online, the majority of traders experience negative emotions like anger, frustration and depression. One study of 31 active participants found that 85% had experienced at least one ‘disaster trade’, where they committed to a trade without proper research and subsequently lost money.
The researchers also found that only 8% of the traders did not experience any negative emotions throughout the trading process. Negative emotions are worse for beginning traders who have no experience of how markets work or use risk management techniques effectively.
Why negative emotions can be harmful to traders
Traders who allow negative emotions to dictate how they trade often end up losing money. For example, suppose a trader is feeling angry and frustrated after having lost on a trade. In that case, this negative emotion will likely cause them to make an impulsive decision like dumping their position to ‘get back at the market’.
This decision will likely lead to further losses, as dumping a trade in a strong upwards trend is a recipe for disaster.
Why trading is so emotionally demanding
Trading stocks can be emotionally demanding because regular market movements are often too slow to show you clearly. Traders often face a period of low activity and boredom. They cannot find anything to trade and then experience periods of high activity that the trader finds overwhelming.
Focus on the process, not the outcome
When dealing with negative emotions, always keep in mind that it is all about your mindset. The pivotal point to being a successful trader is focusing on what you can control – which is following your trading plan and making sure you do everything in your power to maximize profits and limit losses. Inevitably, there will be times when your methodology fails, and losses accumulate. Instead of focusing on the outcome (i.e. “Why am I experiencing all these losses?”), shift your attention to what you can control (i.e. “What can I do right now to minimize loss exposure?”).
Anchor your emotions to a specific price
One way to deal with your negative emotions is by anchoring them to a specific price. For example, you can tell yourself that if the market breaks below support – which is now a vital inflexion point after experiencing losses – you will sell out of your holdings at breakeven. By anchoring your mental state to this price, you can prevent yourself from taking more losses by giving yourself a limit to work with.
Create a recovery plan
Everyone goes through difficult times when trading – it is inevitable. However, there are certain times where the negative emotions experienced are too much for one single person to handle on their own. In these cases, it is essential to set up a recovery plan with someone you trust and open up about what you are experiencing. This could be a family member, mentor, friend, or anyone else who can provide support and help you stay on track.
It doesn’t just fix itself overnight – it requires proactive steps on your part to move past this point in your trading journey.
The three best ways to deal with negative emotions when trading is to focus on your process instead of your outcome, anchor your emotions to a specific price and create a recovery plan with someone you trust. These steps will help traders move past difficult times in their trading journey and become stronger for it.
Trading is an emotionally demanding occupation because of the emotional roller coaster that comes with the territory. There are ways for you to deal with negative emotions and become a more successful trader. You can read more here.