Emotions play an important role in a trader’s life. For some people, emotions can dictate the decisions they make. Good traders do not let their emotions take control of their choices since it might lead to inefficient or inaccurate trades that might affect their profits.
Some of the major emotions that can affect traders are fear and greed. In this article, we will discuss their effects and how to overcome them from taking control of major decisions.
Fear can be introduced in a trader for multiple reasons: the fear of missing out on potential trades or losing on already open trades, maybe even the fear of losing more money if there are already some losses in previous trades.
Fear in traders can lead to many things being affected. Fear in a trader might lead them to rethink their decisions, which leads to slow entrances in a trade, fear of losing on an already open trade might also cause the trader to exit prematurely, hence not earning as much profit.
Greed also has a negative effect on a trader’s decisions in several ways; a buildup of greed may lead the trader to lose patience and aim for quick and large profits rather than keeping a steady trading strategy.
This may lead to them making quick and impulsive decisions that may bring losses instead of profits. After multiple consecutive successful trades, the trader might become overconfident in their decisions and make irresponsible trades without thinking and analyzing the current market conditions.
Pressure from their peers and the people around them might also lead them to make impulsive decisions. They can also overleverage and take excessive risks for a slight rise in profits.
Traders can implement several strategies and acquire some habits that will help them regulate their emotions and prevent fear from taking control of their trading decisions.
Firstly, traders should create a solid trading plan that they will implement on a regular basis. One that will be implemented in every single trade. This will help in reducing the effect of fear on decisions.
Secondly, traders should always have a risk management strategy that is being implemented on a regular basis.
One of the most effective risk management strategies is the 1 percent rule, where traders can put aside and afford to lose 1 percent of their total account value. This will help reduce the severity of losses and therefore, reduce any psychological effects.
And lastly, traders should keep a positive mindset at all times. Make sure to take losses as learning opportunities. Keep notes of what went wrong and prevent them from happening again.
There are several ways in which traders can reduce the effects of greed:
Traders should keep a realistic approach to their trading strategy. Making sure that they have set real and achievable goals, and not hurrying to make as many profits as physically possible.
They should be able to realize their capacity and make sure to keep the goals under that limit. Traders should also make sure to keep a steady risk-reward ratio and refrain from revenge trading after a loss. Sticking to the risk-reward ratio will prevent greed from making the trader from risking more for greater profits.
Traders should also improve their discipline. They should be able to know when to take breaks. Traders should trade defensively, making sure not to overexpose themselves to excess and unnecessary risk. Make sure to keep leverage as low as possible.
Fear and greed can have numerous negative outcomes on a trader’s ability to trade and make related decisions, regulating these emotions is a necessity for a good trader.
Fear and greed can be regulated by sticking to a steady and well-thought-out trading plan that matches the trading style of the individual. Along with implementing robust risk management strategies to reduce losses as much as possible.
Good traders should also be disciplined and know when to take breaks.
