How important are your emotions in trading?

Updated: Feb 11, 2021

I’m sure many of you remember the moments when you felt ‘extremely certain’ about the market or how accurately you predicted but didn’t make a penny. Remember your frustration because you couldn't get rewarded on your correct predictions?

I’ve learned one hard fact as a professional trader: trading behavior is completely emotional. Our brain has two separate centers: one for rationality or logical thinking, and the other for emotions, which makes us impulsive. How well you read and analyses the charts before you take a trade is all decided by the logical or rational part of the brain. Once the trade is live and you begin to experience real profits and losses, the emotional part of the brain becomes very active and tries to subdue logical part.

It can’t be denied that having a solid market strategy driven by logical analysis is very important.  However, in the course of trading, it is not logic but emotions that rule your trading behavior. Emotions becomes the ‘dictator’ that tries to coup your all logic as you experience the live trade.

The emotional centers of our brain were developed millions of years ago, as opposed to the relatively modern centers of logic and cognition. These new parts are at times, no match for the forceful and blunt emotional power of the oldest parts. That’s why we often set out with a logically analyzed and a perfectly planned trade and end up doing something much different.

For example, the emotional brain will cause you to be fearful as soon as you see losses, and send signals to the rational brain, telling it to re-evaluate an otherwise good trade. When the emotional brain challenges a perfectly rational trading decision, the rational part can get overpowered and make you believe you could be wrong, as a result of which you may prematurely end up closing a perfectly good trade in losses.

How we deal with our emotions in the live market is the foundation of successful trading. If this foundation is weak, no matter what you build on it and with however much effort, it could be in vain. No matter how good your technical skills, how much knowledge you have, or how sound your risk management, if your emotional mind isn't under your control, you can trade your account right down to zero.

The next time you feel fear, hope, greed, regret, anger, euphoria or any other strong emotion when trading, remind yourself about how your emotional brain might be trying to take over your rational brain, and pushing you towards something that is not in line with your trading rules. Always remember: the more you are able to read into your own emotions and understand them, the more you will be able to harness them in a way that maximizes your trading success.

64 views0 comments

Recent Posts

See All