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Dealing with emotions can be the most difficult part of trading. It's not the math or the stock picking, but the stress from entering a trade and the fear of potential loss that usually ruins a good trading system.
First of all, to manage the emotions you need to make a long term trading plan. Confidence in a plan comes from back-testing experiments and historical chart research together with faith in yourself to perform with consistency.
Not every trade will win, so do not blame yourself for a drawdown. If you are trading with proper risk management techniques, there is nothing more you can do. Ensure correct position sizing such that a stop-loss triggering is no more than 3-5% of your total capital. Ensuring strict trading discipline is the best thing you can do for your stress level and risk of ruin. Never gamble your entire account on any one trade.
Here are 6 emotions you'll feel while trading:
Despair is triggered when you lose money and there is no progress in your trading strategy.
Do not panic, look at the drawdown as the cost of business, like educational fees from your broker. The outcome of your system is not to be the main focus, but the execution of a systemic signal. Hope can emerge as you grow discipline.
Disappointment arises when perceptions are much higher than reality.
Ground your initial expectations as a trader. What do you estimate your average capital gains to be based on comparable traders using your technique? Based on your win/loss and risk/reward ratio, what do you estimate your drawdown to be? Over the long term, dedicating yourself to a consistent trading system may be profitable and is likely to involve bends and turns along the way. Learning the dynamics of what to anticipate can help curve the disappointment.
Regret is triggered through disappointment from a loss created by a lack of control.
If you follow your trading plan into a loss, that is just part of doing business. If you veer from your plan and trade on emotions or ego, then you should feel regret and the need for discipline. Your job is to execute your trade system with uniformity and discipline on each entry and with each position size so that you have no regrets regardless of the outcome.
You're going to have fun trading when you're making trades that you're not scared to lose or have the potential for risk of ruin because of improper position sizing.
Trading is more fun if you gamble 1 percent of your capital in the expectation of making 3 percent with zero risk of ruin. It's not fun when you put a huge amount of your money on the table and are just a couple losing trades away from your portfolio sliding to zero.
Years of successful trading experience gives traders wisdom.
You have to trade in the real market to get good at trading. Back-testing and reading charts won't make you a successful trader who can execute on the dynamic market conditions while facing real market stressors. Wisdom comes from putting real money on the line for years and showing you can win in the long run.
Trust in your trading system derives from a trust in its success through backtesting and then years of winning with it.
Although you must have a view as to whether any general style of trading is profitable or not, every trader has their own edge with that method. Every trade may be unpredictable in nature, but the concepts of a successful trading system must extend over a sample size that is big enough to grow above the noise and catch patterns. You will overcome a lot of emotional trading if you have no uncertainties about your system. You will solve many of the interpersonal problems that arise in the heat of the action with many other traders, while you have a fanaticism for trusting in your system, method, risk management, and your own discipline.
Interested in learning more about Trading Psychology?
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