Emotions in trading and how to deal with them
The crowd never makes money in financial markets, they serve as fuel for market movements and are doomed to pass their money to a minority.
The cryptocurrency market is young and wild, and the chance of losing your money here is much greater than on any other market. But a chance to increase your deposit is much greater as well, there is no any market which can be compared to.
We have already said that the most important thing for a trader is not to master his technical and fundamental analysis skills, or even not to understand the logic of the actions of major players, but to have an idea of his own mind. After all, it is not manipulators, insiders, or whales that make a trader buy at highs after a week of asset growth, sell at the bottom, make a trade for the entire deposit, and then lose their money. He does this under the influence of his vices. His pride (the desire to be always right), stupidity (lack of qualifications and unwillingness to learn it) and greed.
But in addition to vices, there is also emotions which play an equally negative role. Look at the fear index of August 21–22, it fell to 5. This is an absolute minimum, there were no such values even in the most difficult periods of crypto-winter. At the same time, there is no objective negative — Bitcoin just couldn’t break through 11k resistance and fell just below 10K. Meanwhile, such situation has been three times in the last month. There is no logical justification for this fear now, the big picture is quite ordinary. However, the crowd was paralyzed by fear, which causes many market participants to sell their assets in a situation where it is contrary to logic and common sense.
On August 23, the fear index is back in the flat of 33 zone. The price has increased by 200 points, which is around nothing for Bitcoin. There is no any rational explanation for the fear even a day before.
But this did not prevent many market participants from giving away their assets at ridiculous prices. And they should only blame their emotions for this.
Fomo is based on emotions as well — this is when you buy an asset at the very top, after a long price growth.
When a trade position is held and increased against the trend until the drop, not wanting to admit the obvious. Or when after a series of successful transactions, the trader increases the trade position several times without increasing the deposit size — all this he does under the influence of emotions.
In all these examples, the trader losing money. If he does this often (and a trader who is dependent on emotions does exactly this), then he will soon find himself in a situation where he need to stop trading because he lost of all his money.
A trader can understand when to buy and sell an asset, analyze the market situation, and make correct conclusions. But when emotions are turned on, the mind actually is turning off. By the way, this applies not only to trading, but to any situation where you need to make quick and correct decisions.
So it turns out that the main obstacle to success in trading is a trader himself. His main barriers are market decisions and actions that he makes, guided by emotions, but not the mind.
How to deal with this?
First of all, the problem must be identified. I will now describe in what practical actions different emotions are manifested in the market. If you do not find anything similar to your actions, then you are a terminator and the problem of emotions is not in front of you. Or you can be congratulated on the fact that you have already successfully solved these problems.
Case 1
You can see that the asset has grown by 20–30–50% (you are not in). There is no objective reason to believe that growth will continue, and you understand this. Nevertheless, the thought “what if it grows even more, I’ve already missed a lot” is so unbearable for you that you buy this asset. After a few days (or hours), you realize that you bought it at its peak, and it was a very bad entry.
IMPORTANT NOTE. Above is not a mistake in evaluation of the situation (for example when you think that this is the beginning of a trend and further growth is inevitable). You buy in spite of your trading strategy, only because the desire to buy is stronger than you.
And such situations are repeated many times.
Case 2
You bought an asset, the position is in good profit (let’s say, 50%). You have no objective reason to believe that growth will continue. It is necessary to close the position, but you are suffering by the thought “I will close it, and it will grow”.
Then the price goes against your trade position, the profit melts behind your eyes, you already had 50% profit, but only 10% remains. It is now unbearable to close it at all, because it was just 50%, you have to wait for the price to return there. But it goes the other way, the position goes the opposite and profit does not return.
If such situations occur periodically , you are at the mercy of FOMO.
Consequences are losses due to bad entries into the position and untimely closes. In some cases, it is compounded by the desire to replay with higher risks. Hereinafter, the exit from the market because of lack of money.
Case 3
You normally trade in a quiet market and even make a profit. The price starts moving against your position. First, you keep looking at the chart and calculating your losses. You are overcome by the thought “what if this move continues and my asset will lose a lot in price”?
When your asset has lost 10–15%, you close the position, either manually or by stop-order. And then surprisingly see the price not only returns to the previous values, but also goes to new heights.
Case 4
You wait for the asset price drop in order to buy it. But, when a drop occurs, you did not decide to buy because of fear that it’s not the bottom yet. Then the asset quickly returns to growth, and those who bought it at the bottom, make a good profit, while you are regretting the missed opportunities.
A good example is when Bitcoin was above 12K, a person dreamed of falling at least to 10500 to buy it. The price dropped to 9500, but he still couldn’t make up his mind to buy. When the price went below 9300, he even sold remaining balance, as he was afraid that it would collapse to 7500 and below.
If you recognize yourself, your weakness is fear.
Case 5
You have opened a trade, and the price goes against your plan. There is no objective reason to believe that this is a small correction or market noise. All the facts say that a u-turn against your position is serious and lasting.
The need to admit a mistake and take some action to correct the situation makes you tense — you prefer to believe that the price should go in your direction and give a lot of convincing arguments in favor of your opinion. But the price does not hear you and stubbornly goes the wrong way. You continue to believe that the market movement against you is a temporary and short-term phenomenon and now there will be a reversal. And come to a situation where you can only wait for a turn, all other actions do not make sense anymore.
If such cases are repeated periodically, you can’t admit mistakes and persistently want to prove your right to the market. The same way you can prove to rushing at you vagon on the road — the market indifferently take your next deposit.
Case 6
You received a loss or a series losses. To fix the situation immediately, you start opening a lot of trades increasing the volume. At the same time, market is quite and you just want to beat a loss. The situation is getting even worse, and soon the size of the loss is approaching the size of the deposit.
If this happens again, you are at the mercy of the desire to recoup. But in the market there is a rule: the one who works on it — earns, the one who plays — loses. Players sooner or later go under the knife. And you, too, if you are one of them.
Case 7
You have successfully caught a wave and for a long time trade in profit. Market movements are clear and predictable for you, you are confident about what will happen next and most often do not make mistakes.
Since everything is so obvious, it occurs to you to increase the volume of positions and the load on the deposit. In case you are still in profit it convinces you to the statement “Brakes invented by cowards”. You are confidently gaining huge amounts in the right direction, in your opinion. But the market is suddenly changing. And now you need really outstanding qualities to get out of the place where you are with this big position of yours.
This is the vertigo of success.
If the trader allows emotions to turn off his mind, then the case is rarely limited to one problem. FOMO combined with fear, this is a collective problem of the market crowd, and the desire to prove the market right — with the desire to recoup. It is clear that when several emotions work against a trader’s deposit, the money runs out even faster, and there is almost no chance of survival in the market.
If you keep a trader’s Diary, you can easily identify your problem by analyzing the reasons for unsuccessful trades. When I started running it, I quickly realized that my main problem was bad inputs due to FOMO. Indeed, the situation when the asset is growing, and I do not participate, seriously strained me, especially when it concerned Bitcoin.
But reading my trader’s Diary quickly gave me an understanding that all the entries I don’t like are made not because I had to, but because FOMO. They were all made from the market, after breaking through important resistances, without waiting for pullbacks. The trend saved me from losses, but I could not then buy in the proper amount on rollbacks (due to compliance with risk management), and in general I was deprived of satisfaction from good work.
Without the trader’s Diary, the problem would hardly have been identified so quickly and obviously. Because no one can keep in mind the motives that prompted him to open a deal a week ago, especially if several dozen of these transactions are made in a week. Without understanding the motives of the transaction, it is impossible to identify harmful emotions. That’s why if you want the professional results — keep a trader’s Diary and work with it.
When the problem is identified, decide how to deal with it.
The killer of any emotions is the trading plan and its compliance. If Your plan states that below 9500 is an obvious purchase zone, then you will not think to sell Bitcoin at 9300. You will overcome fear.
If it is written that you need to buy on rollbacks at least 400 points from local highs — you will overcome FOMO. If you specify a limit position size for 1 XBT Deposit for margin trading — you will not be dizzy from success and attempts to recoup.
If it is written that when certain levels are reached, certain actions are needed (closing a position, averaging, etc.) — you will not prove anything to the market, but will act following your plan.
A personal example — when I diagnosed myself with “FOMO in a light form” (in a light form because experience in the financial markets shielded me from more difficult options.), then outlined the measures of struggle. In the trading plan, I indicated that I should enter the trend only on rollbacks of at least 400 points from local highs, and only with limit orders. Positions should be fixed partially, so that in case of a strong recoilless growth in the trend, they do not remain out of the market.
In the Diary, you need to record not only completed transactions, but also ideas to open transactions from certain levels that were not implemented. With a mandatory follow-up assessment of whether it was the right decision not to open a deal.
When bitcoin flew above 13,000 in June, I had a medium-term position and even made partial profit-taking. But the desire to go to a position above 13000 persistently pursued me, and after breaking through 13500 it became much stronger. I wrote in my Diary that I wanted to open such a position and for what reasons I didn’t do it finally. And later noted that he successfully repulsed the attack of my own FOMO.
Do not feel sorry for yourself describing the reasons for a failed trades. I have seen traders ‘diaries where, in all seriousness, the reason for a failed trades was indicated as “read the wrong forecast in the Telegram channel”, or “the whales lowered the price of the coin”.
In fact, there should be another reason for this. For example, “I acted without a trading plan, making decisions about the fate of my money based on some third-party forecasts, although I knew that I should not do so.” Or “in my trading plan, I did not provide for alternative options for the market movement, because when the market went wrong, I did not know what to do and sold everything cheaply, giving in to panic.”
I remind you of the summary of the trading plan. It should answer the following questions:
What stage is the market at now (trend flat)?
What are the long-term and short-term goals on the market?
The most likely option for the price movement and my actions?
The alternative option of the price movement and my actions?
The most unfavorable version of the price movement and my actions?
A good trading plan is when even the third option does not lead to large financial losses, but also retains real prospects for profit.
Summary of the trader’s Diary
You can write everything related to trading — your thoughts on the market and on various instruments, trading ideas, etc. But be sure to have the following for each trade:
- Reasons of opening the trade
2. Info about the trade(opening-closing, volume, instrument).
3. Trade result (profit-loss) and comments.
Once a week (or a month, for low-frequency trading) to analyze trades, with the mandatory identification of the causes of losses or missed profits. The Diary doesn’t make sense without it.
Let’s sum up the main topics.
Emotions are the main enemy of the trader and the reasons of financial losses.
Emotions can and should be successfully defeated. The main tool is the trader’s Diary and trading plan.
It is necessary to start the fight by identifying the dominant emotion by setting rules in the Trading plan that will exclude the influence of this emotion on the trading result.
Ruthlessness and self-discipline are the key to success in dealing with emotions in trading. However, these qualities are the key to success not only in trading but generally in life.
Subscribe to my Telegram channel “Chief in Crypto”
My channel in English language
My channel in Russian language
Do you have any questions? — Contact my manager @manager_cic