We often see traders repeating the same mistakes over and over again, jeopardizing their long-term trading goals. Emotions can get in the way of sound decision making. How do we set emotions aside and ensure objective trading moves are made? The first step is to recognize the seven common emotions seen in this profession, which can sabotage the long-term prospects of a trader. This is what makes them the seven deadly sins of trading.
A little bit of fear is a good thing because it drives us to do better. However, too much of a good thing can be harmful. Therefore, when traders act out of fear, they might exit a position too early, cutting short their gains, or hang on to a losing position in fear of missing out on a reversal. A series of losses can intensify fear, and this is only natural. Being able to identify this emotion is the first step to overcoming it. Always get back on the horse immediately, even if it means practicing your skills or testing strategies on a demo account.
Chasing a “big win” can become addictive. Hanging on to a position just to make a little more profit could even end up wiping out your entire account due to a sudden and steep reversal. This is where take profit and stop-loss orders come in handy, ensuring that you exit positions at the right time, without allowing emotions to cloud your judgment.
A series of gains can make a trader over-confident. As a result, they might chase trades, to prove that they know better, regardless of the market conditions. Accepting mistakes is important. Pride and ego will stop you from getting valuable information from fellow traders. It can slow down your learning curve.
Anger leads to irrational and impulsive decisions, in both our personal lives and in trading, leaving us to regret at leisure. Many forces guide the markets and they don’t care about your feelings. However, trying to extract revenge is unlikely to lead to anything fruitful. Losses are inevitable in trading. It is wise to learn from them and improve your trading skills.
While it is always great to evaluate your trading strategies before deploying them, too much analysis can cost traders good opportunities. Using too many technical indicators can lead to contradictory signals. Many traders go through what is called “analysis paralysis.” They don’t know how to use the massive amount of available information in the right way. The solution is to create a trading plan and stick to it.
It is important to let your trades run their course before you lock in profits. Impatience can lead to losses. Follow your entry signals and don’t exit a position until the system gives a message to do so. Don’t switch trading strategies after every loss. Patience comes from discipline. This is what differentiates a successful trader from a reckless gambler.
Despite the modern electronic trading systems with expert advisors, we cannot negate the value of studying charts carefully and being thorough with market fundamentals. Having a good risk management system in place is essential too. Trading without a plan is risky, especially in leveraged trading, where a small mistake can wipe out entire accounts.
Every trader should find out what emotions tend to rule them. Identifying and accepting these emotions is the key to overcoming them.