Controlling emotions that cloud your judgment

Controlling emotions that cloud your judgment

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Some types of emotion can affect the clarity of your thinking, and so impact any trading decisions you make.

Anger

A losing trade can make you furious - often simply with yourself, for making a bad decision.

But we all make mistakes - it's an important way to learn. If it happens to you, as it inevitably will one day, put it down to experience and make a mental note about what to do differently next time.

One common impulse in moments of anger is to try and 'get back at the market' by placing another trade. This sort of knee-jerk reaction - or 'hair-trigger trade' - is nearly always a bad idea. Alternatively, you might just start buying anything and everything indiscriminately. This is known as 'shotgun trading'.

Take a moment to sit back and breathe deeply, then consider objectively whether your proposed trade really makes sense and is in line with your overall trading strategy.

Relax

Regret

Another common source of annoyance is missing an opportunity - something that's easy to do in the fast-moving world of financial markets.

When this happens, it's easy to give yourself a hard time about it, repeating things like 'I should have bought there' or 'I knew that was going to happen'. But this sort of mentality can lure you into traps capable of undoing all your hard work at a stroke.

You might, for example, be tempted to place a belated trade anyway, or to risk placing a number of trades in quick succession - known as overtrading - to set things right. You might even 'go on tilt', a particular state of mind which means you make irrational decisions, rather than those based on the merit of what's right in front of you.

That's why, if the moment has passed, you need a few tricks to remain clear-headed until the next signal comes along.

Fortunately, those tricks are as simple as taking a break, casting an eye over your original trading plan and exercising a positive mentality - remember, missing a move is not the end of the world.

Sentimentality

Suppose you've traded gold several times, and each time you've made a healthy profit. It might be tempting to start believing (perhaps subconsciously) that 'gold is your friend', and that it will reward you in the same way every time.

Gold

Once this conviction grows, there's a danger that you'll open further positions in gold without properly considering the current situation.

Unfortunately, the fact that a particular instrument has been profitable in the past is no guarantee that it will continue to perform for you. But likewise, if you've had a bad experience with a certain asset that's no reason to shy away from any future opportunities it offers.

Stress

There are times in all of our lives when events beyond our control affect our ability to think clearly.

It could be divorce, family illness, bereavement, or just moving house or changing jobs. All of these things will distract you from trading and could cloud your judgment.

The world of financial trading can be hectic, demanding your undivided attention. So when you're going through stressful periods, it's often safest to put your trading on hold until you can commit the necessary time and energy to it again.

summary

Don't beat yourself up about poor decisions or missed opportunities. Learn from your mistakes and look forward to getting it right next time

To avoid going on tilt when things go wrong, take a break, remind yourself of your trading plan, and wait until you're back in a positive state of mind

Remember that sentimentality and superstition have no place in trading. No market is your friend or enemy, and every opportunity should be assessed on its merits

When you're suffering from stress in other areas of your life, it may be wise to put your trading on hold

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