By Sam Evans, Co-Founder & CEO

What could be more pertinent, not just for trading and investing, but in all areas of our life than learning to control our emotions? Sometimes, it’s good to let our emotions out… and sometimes it’s not. When it comes to trading psychology, fear is a powerful emotion. Fear has its place. It can stop us from doing dangerous things. However, fear can also hold us back. When it comes to trading and investing, I see this a lot. One of the easiest ways to control our emotions and improve our trading psychology is to have a rules-based plan.

The less the trade becomes about us and more about our rules and plan, the more we have steered ourselves towards achieving success in the markets on a consistent basis. The plan tells us what to do, as opposed to us looking at a chart and using what we think, feel, or fear to guess what we should do. There is a big difference between basing our choices on logic rather than greed or fear. Ask yourself how many times you have noticed that difference in the choices you have made in the past and how that eventually worked out for you?

Trading psychology: modelling success

Controlling emotions is perhaps the toughest obstacle we face in making our trading goals a reality. Every single time a candle on the charts turns green or red, we can be easily tempted to click the buy or sell button on a whim, without any real reason to be entering at all!

In the early stages of my trading education, I was taught that candlesticks and trend on a price chart are nothing more than simply a representation of people’s emotions when they buy and sell. Rising prices show greed in the markets. When prices are falling, it is the fear taking over…or so they say. I now see fear and greed from a different perspective, and I would like to share that with you.

Here at StockAbility™, mindset is a big part of the learning process. There’s an NLP approach called modeling where you aim to model someone who is successful in what you are trying to achieve. This is an excellent technique that you can apply to any area of your life. We use a version of it to teach our students to think and act like a fund manager.  

Think about this for a second: when a fund manager places an order to enter the market to take a position, do you think that they are worried about losing the trade and how it will make them feel? Or do you think that they find it easy to pull the trigger? After all, their superior has already given them their risk parameters and the money at risk is not actually theirs. Taking the trade is nothing more than their job. They are getting paid for doing that job, likely with a nice performance bonus attached to the salary.

On the other hand, let’s think about you, sitting at home and taking the same trade, but with a much lesser size. For a start, it’s your own money that you’re using. The outcome of the trade will affect your money, in your account. Plus, if you’ve decided to rely on the money you make from trading then your income depends on what you do. This is very different from a fund manager or trader who works for an institution and will no doubt still earn at the end of the month if they follow their instructions and trade plan as outlined to them by their superiors.

Fear is the overriding emotion for many

In all my years of teaching trading and investing education, I do not meet many traders whose overriding emotion is greed. When I meet potential students and ask them why they want to trade and invest for themselves their aim isn’t to make huge amounts of money, to have their own helicopter! It’s usually about extra income, more flexibility, or a new career direction. Drilling it down it becomes about paying for college, additional money for traveling, working for themselves, or spending more time with their family.

For those already trading and not making it work as they would want, their answers are around consistency. They just want to be able to achieve their goals with low-risk trades and slowly build upon this. It does not become about greed at all. It is the fear which tends to be the biggest challenge of all, new and experienced traders alike. The fear of making a change, the fear of something new, the fear of loss, the fear of failure, and the fear of not being right.

Overcoming fear

For someone interested in trading and investing, it’s the fear of not making it work that stops them from trying. For someone already trading, it’s the fear which stops them from taking a solid setup in the markets because they’ve been on a losing streak. Then get more emotionally frustrated when they see it work out well and the opportunity missed.

It is fear which causes us to not follow the trading plan to the nail. To make irrational changes all the time because the odd trade fails to work. It is fear which causes us to get out of a trade far too early with a small profit. This is because we are scared to hold on in case it becomes another loser. It is fear which makes us search over and over for the perfect strategy. Guess what? It doesn’t exist. Fear drives us to search for something new because we fear we are missing out.

When it comes to the psychology of trading, fear is the biggest hurdle you will face. It will hold you back more than anything else ever will. Recognize that fear needs to be controlled with a plan and discipline. Once the consistency comes, then the fears will subside over time. Oh, are you wondering what I feel about greed’s place in the market? Well, that is an easy one. Just ask yourself a quick question: Why do people become greedy? Because they are fearful there will never be enough…

When it comes to trading, and most things in life, our biggest opponent is ourselves. Thank you for reading,

Be well,

Sam Evans

[email protected]