I was working with some Exchange Traded Fund (ETF) traders today, and we had an interesting side conversation. We talked about how important of a role our emotions play when we trade. Not what we discussed is relevant for any kind of trading, stocks, ETFs, forex… you name it. No matter how you slice it, controlling your emotions will be crucial to your success. So, let’s discuss some of the problems that occur with our trading emotions. Emotions are a natural part of us as humans so it is something that we all need to deal with. Emotions are good but can cause us to act poorly when it comes to Forex trading.
I don’t want to talk about specific types of emotions but rather the range of emotions that can occur when trading. This range of motion is enhanced by the fact that we are dealing with our own hard earned money. When we are dealing with the emotions of making or losing money this can push our emotions to the extreme levels. These extreme levels can be the cause of poor decision making when trading.
The two extreme range that can happen with us as we are trading go from extreme happiness to extreme sadness. These may not be the best way to describe it but hopefully you get the idea that our emotions can range from one extreme to the next. This fluctuation in emotions can occur over a very short term or can take a long time to develop.
Let’s first describe what happens when the emotions go to the extreme on the happy side. This might sound like a good thing but can become a negative issue. As one experiences success or temporary profitable trades our emotions can move to the extreme of happiness causing us to think we are very good at trading. This may be true but it also may be the result of a lucky or unplanned trade. Sometimes when we are successful by chance we feel it is because we are trading well. If our success is the result of trading well we will have long term success, not just temporary wins. This false sense of happiness is because we got lucky it will cause us to make poor decisions going forward. This is the type of trader that has a lucky trade, then goes around bragging about how much they made or how great a trader they are. Sometimes even jumping up and down and singing a happy song. If you see someone like this you know that it is likely that they are showing signs of the lucky trader. If we begin to act like this we need to evaluate the reason why we are so happy to make sure it is because we are trading well and not just that we got lucky one time.
The second extreme is extreme sadness. This is when we have taken loss after loss or when we have taken a loss that was more than we anticipated because we did not close the trade when we needed to. By not following our rules we do things that make us unprofitable. This profitability can lead to extreme unhappiness. In addition, the poor trading leads to more poor trading and we loose confidence in our own abilities. If we are sad in the end we will stop trading all together.
So, as our emotions go from extreme to extreme we experience a roller coaster ride of emotions. These emotions usually make us trade poorly. But what may be even more damaging is simply swinging from one extreme to the other. This can cause us to not enjoy our trading and ultimately, even if we are profitable, cause us to stop trading.
The solution to this roller coaster ride of emotions can be many but one thing that needs to be done regardless is to have our rules outlined and we need to follow the rules we are using. If we can do this we will never be in a situation where we take huge winners and huge losers. So if you’re trading ETFs, or anything else for that matter, we will be consistent in our trading and our emotions will stabilize so we can develop longer term success as a trader. Have your plan and trade it!