Understanding Trading Emotions – The Emotions Cheat Sheet
PreviewAs any trader will know, psychology and emotions play a major role in trading and how well you can handle emotions defines your trading success – we don’t have to tell you that. When it comes to dealing with emotions, however, traders often don’t really know how to deal with them and don’t know how to avoid making emotionally caused trading mistakes.
Knowing which emotion interferes with your trading isn’t as easy as it sounds and the way emotions manifest in your trading is usually very subtle. However, there are ways to read emotions from your trading decisions. Knowing how to interpret your trading decisions will help you avoid the most expensive trading mistakes and you will be able to control emotions much more effectively.
The following points show you how you can identify the emotions and drivers that are behind your trading decisions:
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Moving stop loss orders farther way
Widening stop loss orders when you see the price is moving towards your stop loss is a clear sign that hope and fear are controlling your trading decisions. Your stop loss should be the point where you accept that your trade idea is invalid. If you then widen your stop loss it shows that you are not ready to realize a loss and that you hope that price will turn around.
[fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] [fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] In Edgewonk: when you see that your finalized trades have a R-Multiple of smaller than -1R, it shows that you let price run beyond your initial stop loss. For example, a trade with an R-multiple of -2R means that you took a loss twice the size of your initial stop loss.
Closing profitable trades too early
If you close your trades before they reach your take profit order, you are lowering the expectancy of your trading strategy. In such a scenario, fear and greed are the main drivers behind your trading decisions. Greed makes you want to realize the profits because you fear that price can turn around any minute and you will be left with nothing.
[fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] [fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] In Edgewonk: Start by comparing your traffic lights. Do you often see that an initial green light turned into a red one after you have closed the trade? This could be the first sign that you are mismanaging your trades. Then, go to your Trade Management tab and check whether your potential performance is greater than your actual performance.
Not entering a trade, although you see all your entry criteria met
A trade that you miss even though you have mapped out the scenario in your trading plan is often the result of fearful trading. Especially when starting to trade with real money, the fear of losing can mess with a trader’s mindset. In a losing streak, your confidence might be stricken and you pass on valid trade signals as well.
[fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] [fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] In Edgewonk: Go to your Sessions tab and start recording missed trades and what made you stay out of the market.
Entering too late
This scenario is an alteration of the previous one. Entering too late and chasing a trade after seeing that price has moved in your favor is caused by fear and greed. The fear of missing out is a very strong driver behind many trading mistakes and it is important to unmask such behavior in your trading.
[fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] [fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] In Edgewonk: If you believe that entering too late and chasing trades is a problem in your trading, you should set up an Entry Comment and start tagging your trades. Over time, you’ll be able to identify scenarios when you are most likely to make such mistakes.
Violating trade entry rules
Missed trading opportunities or going a long time without a trade signal can lead to boredom and premature trade entries. Violating trade entry rules and prematurely jumping into the market is common and the emotions behind such a behavior are boredom and hope. Bored traders hope to somehow, accidentally, stumble into a profitable trade they shouldn’t be in the first place.
[fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] [fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] In Edgewonk: If you feel that this is a problem in your trading, also set up an Entry Comment and start tracking such trades. Additionally, make sure to implement rules into your trading routine that will help you be more organized in your trading and minimize screen time.
Widening take profit orders
Widening take profit orders can change the whole outlook of a trading strategy – although this does not get a lot of attention usually. When traders widen their take profit orders, they often hope that price will move further because their greed responses tell them that they could make more money. Whereas their intentions are good, those trades often give back profits unnecessarily.
[fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] [fac_icon icon=”chevron-right” color=”#333333″ color_hover=”#333333″] In Edgewonk: Start by analyzing your Updraw values and see how far price really moves in your favor. Only if the Updraw values exceed 100% on your winning trades, you can think about using wider profit targets (we will focus on that during the next module).
Conclusion: Emotions are often more subtle than you think
A trader biting nails, screaming at his screens or rubbing his hands greedily is not how emotions manifest in trading. The trade management decisions and the way a trader reacts to what he sees – or believes he sees – on his trading platform is driven by his emotions. Being able to translate trade management decisions into the emotions that stand behind such behavioral patterns is the first step to breaking bad habits.
