Emotional trading

Probably one of the most common terms in the world of trading, emotional trading really speaks for itself.

It refers to human behaviours that come about because of volatile markets, resulting in feelings rather than rational data driving trade executions.

Also known as emotional investing, emotional trading is usually characterised by negative feelings like panic, anxiety, greed, stress, and many more.

It may also include arrogance or impulsion. Having an acute awareness of these emotions and their impact on trading decisions is key to safeguarding a trader’s capital.

A major component of emotional trading is the attempt to understand the emotions that traders or investors experience in respect of money.

This also extends to how these emotions drive financial decision making in the process of handling the challenges that unpredictable markets bring.

Interestingly it’s not only the influence that negative emotions have on outcomes that is under scrutiny, but also positive feelings.

Ultimately, this is because regardless of which side of the spectrum they fall, euphoric feelings can result in poor decision making just as much as anger or depression can.

So, what is it that traders or any other financial practitioner should take heed?

Well, for one, it’s recognising that you’re feeling a particular way, and then taking the steps to get a good handle on those emotions.

It requires acknowledging that feelings are also deeply rooted in bias which can very quickly cloud sound judgement. In the context of emotional trading, this refers to biases like:

Mitigating the impact of emotional trading

There are several strategies a trader can apply to limit the impact of emotions when executing trades.

For one, investing time in building a disciplined trading plan based on research and data is key.

Not only does this nurture more focus but ensures trading decisions are based on actual data rather than knee-jerk reactions to market movements. Ensure the plan integrates strategic risk management tools to protect your positions and limit capital loss.

This is particularly relevant if utilising leverage which has the potential to magnify losses exponentially. Consider appropriate position sizing as well that aligns with your budget and tolerance for risk.

A diversification approach to spread risk and avoid getting too attached to one type of asset or investment may also be useful. Just as important is engaging in ongoing learning to fully understand the financial markets, particularly the factors that drive it in a particular direction (bearish or bullish).

Without doubt, trading with no emotion whatsoever is very difficult to achieve.

We are human beings who operate on feelings day to day, so relying solely on trading instincts and eliminating their influence on activities like trading is nearly impossible.

However, half if not three quarters of the battle is recognising your triggers and the feelings they evoke, and then taking measures to mitigate their influence on entering or exiting positions.

Take heed of the tips we’ve mentioned here and try and integrate them in your overall trading strategy and approach.