In trading, it’s not enough to have a strategy with an edge. You have to also have the confidence and persistence to adhere to your trading strategy even in the toughest of times. This is easier said than done. But as all successful traders have come to realize, it is of utmost importance to have a psychological edge in trading and the ability to control your emotions and stay focused. In this article, we will take an in-depth dive into this topic, and provide practical solutions for building and maintaining a winning mindset.

Understanding Negative Emotions

As traders, when we put our hard-earned money at risk in the market, we can tend to become emotional during the trade. Typically, since our attachment to those funds in our account are strong, any perceived loss results in a feeling of uneasiness and sometimes even panic among some traders.

As a beginning trader, these emotions can weigh more heavily on you and can lead to a loss of focus and produce inferior performance.  Therefore, it is critical that you address negative emotions related to your trading head on so that you can try to minimize its adverse effects.

Some examples of the most common negative emotions that traders experience include the following:

Frustration –  Getting frustration with yourself or your trading system for making a bad decision in the market, or not feeling confident in your strategy.

Depression –  Going thru a string of losing trades and having to deal with a large unanticipated drawdown. You beat yourself up psychologically and may even begin to enter into a depressive state.

Panic – You might have put on a position that is much larger than you typically are comfortable with. You may have neglected to use a stop loss order, and now your position is going deeply against you and you begin to panic and feel paralyzed to act.

Desperation –  Maybe you sold at a support level, but the price shot up from that level and now you are holding a large unrealized loss, and you pray and hope for price to get back to your breakeven level, so you can just get out of the trade without a loss.

Greed – You are in a winning trade, but now technically everything on the chart is telling you to get out of the trade and lock in your profits. But you feel in the back of your mind that this is going to be a big winner, and you need it to be to help pay for that Valentine’s Day gift your planning on buying for your girlfriend. Subsequently, due to your blind greed in the market, you wind up taking a loss on the trade.

Developing Positive Emotions

Trading is challenging enough without the extra baggage that comes from negative emotions.  So, it is paramount that we not only try to neutralize the negative emotions during our trading, but in addition we should strive to develop positive emotions that will help build a winning mindset. 

Here are some positive emotions that you should work on that will help you improve your trading process:

Think Positive – Every action begins with a thought. Think Positive and you will attract positive energy. This is the law of the universe. You must believe in yourself and in this tenet to build a positive trading psychology. Remember, the glass is always half full not half empty. 

Be Patient – Good things come to those who wait. This is especially true in trading. Do not chase a trade. Instead learn to sit back and let the trade come to you. And if you miss the trade, then so be it, but you will have the satisfaction of knowing you did the right thing. And that is what will pay off in the long run.

Be Thankful – The market is making itself available to you to generate profits. Be thankful of that. Know that the market exists to facilitate trade for you. So regardless of a winning or losing trade, just be thankful of the opportunities that the market is providing for you daily.

Feel Inspired – No doubt that trading is one of the toughest professions out there, but there is light at the end of the tunnel. Challenge yourself to tackling the market, regardless of how long it takes. You believe in yourself and your confidence in becoming a consistent trader.

Be Passionate – Remember, if you love what you do, you will never work a day in your life.  Be passionate about the market. Take in everything, not because you simply want to turn a profit, but because you truly love the markets and trading.

Be Persistent –  A string of losses is natural. It happens to world renown traders, and it will happen to you. A loss is nothing more than the cost of doing business. You either win on a trade, or learn a valuable lesson. Keep at it, and know there are no shortcuts. It takes a minimum of 10,000 hours to master any craft. Trading is no different.

Visualize –  Every morning you can train your mind. You should visualize the trading day, imagining the setups you will take and the process that you will follow in executing the trade. You go thru each stage of the trade in your mind and feel confident that you will calmly and methodically do the same during the live trading session. 

Prepare Better

We have learned how negative emotions can hold us back from realizing our full potential, and how we can work on building up positive emotions to enhance our trading performance.

Now we will shift our attention to discussing eight concrete tips and strategies for controlling your trading emotions in the market and staying focused while trading.

One of the best way to reduce anxiety and stress associated with trading is by being better prepared. This means doing your research and due diligence before the market opens.

This includes such tasks as plotting the key support and resistance levels on your charts, checking all scheduled news events, and analyzing potential setups. While the market is open, you should be focusing primarily on execution and not market research.

Think about other aspects of your life, and it should become wholly apparent to you how proper preparation can put you at more ease with respect to the task at hand. Remember back in school, how you stressed out about your final exams because you didn’t really study for them.

Compare that to the times you did prepare better. I’m sure you can agree that you fared much better both emotionally and grade wise when you actually put in the required time to achieve the desired result. Trading is no different. Proper preparation is key and the value it brings to the trader should not be underestimated. 

Have a Trading Plan

There are countless reasons why you should have a trading plan, not least of which is because it will help you to stay better focused and disciplined. A good trading plan by its very nature helps to reduce the negative emotions associated with trading because it acts as a predefined guide or action plan for events both foreseen and unforeseen.

With a well-constructed trading plan, you will not be caught like a deer in the headlights, paralyzed to act. Instead you will know exactly what needs to be done regardless of market conditions.

So, what are some of the important questions that need to be answered within you trading plan?

Here are some questions that you should address:

Which markets do you plan on trading?

How will you define your risk on a trade?

How will you define your position size?

What is the maximum drawdown you can reasonably tolerate?

How will you define success?

What criteria will you use for entering and exiting a trade?

Which trading timeframe will you focus on?

What’s the max leverage you plan on using?

How long do you plan on staying in a trade?

How much money will you put into your account?

How will you handle weekend exposure?

How will you deal with correlated signals?

How will you deal with a potential black swan event?

What steps will you take to improve your trading psychology during a drawdown?

I would guess to venture that less than 5% of traders ever take time to put together a serious trading plan for themselves. But experienced traders know that it is an essential ingredient for success in the market.

Stick with your strategy

Many newbie forex traders are like nomads. They simply flock from one place to another. One week they are trading a Support and Resistance based strategy, another week they might be trading using Elliott wave, and yet another week they might be applying Gann based techniques or something else for that matter. This lack of discipline and focus is not only counterproductive but also results in unnecessary emotional ups and downs.

The point is that you need to fully dive in and learn a methodology that you feel comfortable with and one that suits your personality. Once you have found that, you need to learn as much as you can about it and start applying those trade techniques in the market. You should not bail out on it without giving it a proper go.

A proper go means taking and analyzing at least 100 trades. But bailing out too early on a trading strategy is exactly what most new traders tend to do. Many novice traders seem to be searching for some no loss holy grail system in the market which does not exist. This leads them down a road of unrealistic expectations and eventual letdown.

Successful traders find a strategy and stick with it. They know and accept that their strategy will have losses, sometimes even a string of uncomfortable losses. But at the end of the day, if they have back tested and stress tested their methodology over time, these traders know that their strategy has a defined edge, and their job is to execute the trades and simply let the odds play out over time.

Create a Checklist

An excellent non-trading book that all traders should read is called “The Checklist Manifesto” by Dr. Atul Gawande. In the book, Dr. Gawande discusses the benefits of pre-operation checklists to improve the surgical process and reduce the occurrences of infections associated with surgery.

His book also talks about the advantages of preflight checklists that Pilots perform and how they can help reduce Pilot errors in the commercial aviation industry. His findings show that the use of checklists can be adopted in many different applications, and that using it regularly can improve the overall performance of a task significantly.

But what exactly is a checklist and how can we apply it in the trading world?  Firstly, a checklist is simply a chronological list of events or steps that need to be performed for a particular task. It’s quite simple but can have profound advantages for those using it.

It provides you a roadmap so you spend less time on thinking about the process and what you may or may not have forgotten. It enables your mind to free itself from the smaller, monotonous details. It forces you to think and act in a methodical manner and can reduce or remove negative trading emotions that weigh on your mind when you do not have a clear course of action.

A trading checklist is a must for creating as much of an emotion free trading experience that is practically possible. And best of all, if you have a specific trading process, then you can create your own trading checklist.

Have a Circuit Breaker

Have you noticed that streaks are very common in trading? Sometimes you are hot and experience a winning streak. Other times you are cold and can’t seem to book a winning trade for your life.

Obviously winning streaks are great when they come, but it tends to bring with it our tendency to feel overconfident even arrogant to a point where we can sometimes bypass many of our strict risk parameters.

Many times, it’s a good idea to take a step back after three, four or five winning trades in a row, and just remind yourself that even though you are in a winning streak, it is even more important now that you review and adhere to your trade plan and all the risk parameter that are in place.  And it’s a good idea to cut down your position size during a winning streak, or simply take a break and come back after a few days fresh and clear headed again.

Losing streaks can be emotionally draining. After three, four, five or more losing trades, we start to question ourselves, our abilities, our strategy, and everything else in between. This can lead to fear of trade execution, or worse we may begin to override elements of our pre-defined trading plan.

Once of the best ways to overcome this emotional low is to first begin by recognizing and really believing in the fact that losing streaks are common for most all traders. And as long as it is within the variance of your back tested model, you should not become overly alarmed by it. So first is instilling that belief in yourself. Also, it would be a wise course of action to reduce your position size during a losing streak, or take a break and step away from trading for a few days or longer and come back with a new perspective.

Stop staring at your PnL

Traders are human beings first, and as humans we have a tendency to be attached to our money.  It pains us to lose it. There have been several experiments done that show that as humans, our psychological makeup is such that we are more prone to avoiding a loss than we are of acting to realize a gain.  And this characteristic tends to be ever present in our subconscious mind, upon which we make decisions in our daily lives.

This plays out in the markets as well. Many traders have a constant need to check their P&L (Profit and Loss) on a trade at an almost unhealthy frequency. They seem glued to every up and down tick in a trance like state. This stems from our inherent fear of losing. And it is this market psychology behind the fear of losing that is the underlying cause of micro managing and over monitoring your P&L. You begin to make decisions in the trade not based on market derived information but rather on where your P&L currently is, where it was before, and what your expectation of it should be during a particular trade.

Obviously, this type of obsessiveness is not only counterproductive but can also be psychologically damaging for the trader.  It is a fact that you will be the most unbiased during a trade just before you enter into it. So, one way deal with this problem is to use a Set and Forget trade management approach. You would place your stop loss and take profit target in the market, the moment you enter into the trade, and then simply walk away and get on with the rest of your day.

Have Realistic Expectations

Thousands of new traders flock to the forex market every day because they have heard or seen someone that has made huge profits trading currencies. Well, of course there is alot of money that can be made in the foreign exchange market, but as a newbie you have to be realistic and have realistic expectations.

Just because someone else was able to produce a 100% or even 200% return in a relatively short span of time, does not mean that you can duplicate those results. In fact, it doesn’t mean that even that trader can duplicate those results again. So, the point is that you should treat trading as a business, and come into it with realistic expectations.

The FX market is not where you want to be if you are looking for a “Get Rich Quick Scheme”. It is a place that you come with a healthy amount of respect for risk and put in the hard word required to be able to someday call yourself a successful trader, making a fairly consistent return on your capital every year.

If on the other hand, you expect to become a millionaire in 6 months time with a starting capital of $ 5,000, you are setting yourself up for disappointment. Would you reasonably be able to make that in any other business venture? Of course not. But for some reason, alot of newbies feel this is not only possible but quite achieve when it comes to trading in the forex market, which in reality is a complete fantasy.

Know when to stay out

Successful traders know that it’s as important to know when not to trade as it is to know when to trade. There are certain times in the market or in your own life when it is not advisable to take a position in the market. We breakdown some of these times below:

Important events in your life –  If you are going thru some life changing event in your personal life such as a wedding, a family member’s funeral, a baby on the way, or anything else that can trigger additional stress, it would be a good idea to take a break from trading and come back after your mind is free to focus completely on the business of trading.

Highly anticipated news events – Certain types of economic news releases can cause unusually high volatility in the market. Examples would include NFP day (Non-Farm Payroll report), Central Bank rate statement, and speeches by high ranking government officials. You typically do not want to initiate any new trades just prior to these announcements and typically want to wait until the market cools down a bit after these announcements before resuming trading activities.

Bank and National holidays –  When there is a bank or national holiday in a major country, the volume in the market, particularly in that currency will begin to shrink. Most of the major players are on the sidelines that day, so any moves that occur are typically short lived.

Uncertain Geopolitical times – When there is uncertainty about an important political election or a vote on an important referendum such as Brexit, it is usually best to be out of the market. The additional risk exposure often outweighs any reason for initiating or staying in a trade during this time.

Summary

In this lesson, we have shown how our negative emotions can get the best of us and our trading, and how we sometimes fall victim to emotional trading. We have also addressed some of the ways that we can work on reducing these negative emotions and how we can enhance positive emotions to improve our trading performance.

In addition, I have provided some concrete tips and strategies that you can use to stay focused and disciplined in your trading. Much of what we have learned is not always easy to apply but with practice and persistence, you can train yourself to control your emotions and take you trading to the next level.