For most people, trading is like riding a roller coaster- filled with the highs of winning trades and disappointments from the losing ones. While even the most successful traders experience losing streaks, they maintain their balance by eliminating the emotional element from trading.
But this is easier said than done. Here are five tried-and-tested methods you could use to manage emotions and trade like a pro.
1. Follow a trading system
A trading system is a set of rules that generates buy and sell signals. This helps you stay objective and remove any ambiguity when deciding which trades to go for. Examples of some simple trading systems could be:
a. Buy when a 5-day moving average crosses up the 20-day moving average
b. Buy when a stock forms a hammer candlestick pattern after a downtrend
c. Buy when the first time a higher top and a higher bottom pattern is formed after a prolonged decline in the stock price.
Pro-traders fine-tune such trading systems with additional confirmation from data like rising volumes, indicators in the oversold zone, comparison with the trend of the benchmark index, etc.
The biggest benefit of such a trading system? Your trades are backed by raw data, not just ‘gut feel’.
2. Plan your trade, trade your plan
Once you have identified a stock/index to trade, plan the entry price, exit price in profit and the stop loss level. After entering the trade, stick to your plan. Having pre-decided exit levels and following them through will help avoid taking profit too soon or letting your losses run too long.
3. Use technology
Sounds too much? Don’t sweat. Everything we have discussed above is available at your fingertips. You can set the parameters of the trading system on a stock screener and it will shortlist stocks exactly how you want them. No cutting corners.
Similarly, to follow through on your trading plan, use tools like GTT orders to set targets and stop loss orders, when you enter the trade. GTT orders are available for F&O and equity orders.
4. Replace FOMO with JOMO
At some point, you will come across a situation when the market is booming, people around you are making profits and social media is abuzz with profit screenshots, but your trading system is not generating enough trades.
That’s when FOMO or the ‘fear of missing out’ kicks in for a trader. Under this emotional pressure, traders make a mistake by changing their trading system. Even though the original system might have given wonderful results in the past.
Remember, markets are cyclical and when the cycle turns, your trading system will start working well again. So, be patient, avoid comparison with others and replace FOMO with JOMO or the ‘joy of missing out’.
5. Finally, here are the three quick hacks to keep emotions at bay.
a. Avoid revenge trading: A significant loss in trade could trigger emotions such as anger, greed, fear or shame. In a bid to recover losses immediately, a trader could ‘overtrade’. The best way to avoid revenge trading of this sort is to stop. Avoid trading for a short period of time. This gives you time to review the errors made and take corrective steps.
b. Filter through the noise: In a world of information overload, choose your information sources well. Also, limit the number of sources. This will ensure your emotions do not swing based on every bit of information floating around.
c. Avoid compulsive trading: Excessive trading and trading for a ‘thrill’ are sure-shot ways to lose money in the market. If you are in this zone, take a break from trading. Restore yourself and come back resolved to follow your trading system.
As one of the best-selling authors of trading books once said, “Never argue with your trading system.”