Understanding trading psychology and the risks of unchecked emotions is as important as understanding market conditions and technical skills. Emotional trading in particular can significantly impact your trading performance and potentially lead to significant losses. Just being aware of this and learning how to effectively manage your emotions can be the difference between success and failure. Okay... but what exactly is emotional trading, and is it really all that big a deal? Read on and find out.

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WhatEmotional Trading?

At its core, emotional trading is when traders make decisions based on feelings rather than solid facts and analysis.

Generally, feelings are great. They’re what make us human after all! It's a completely natural response but, left unchecked, these feelings can easily lead to irrational choices in the market. Emotions such as fear, greed, and euphoria all have the power to cloud judgment and lead to suboptimal trading decisions.

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Examples and Effects

Imagine you've just made a significant profit in a short time – you’re feeling invincible, riding the high! This euphoria can make you overconfident, leading to risky trades without proper analysis. Or, consider the fear of missing out (more commonly known as FOMO), where hearing about rapid gains from other traders may tempt you to jump into a trade without proper research or adherence to your trading strategy. Emotional trading can also manifest as holding onto clearly losing trades out of hope or exiting profitable ones too early due to fear.

As traders, we should also be aware of potential biases which can affect trading decisions, often resulting in important warning signs being ignored.  

The gambler's fallacy, for example, is the mistaken belief that if an event occurred more frequently or less frequently in the past, it's more or less likely to occur in the future. In the context of trading, this could be when a trader expects 'due' success after a string of losses, which isn't how markets work.

Anchoring bias is when people rely too heavily on early information. This can be seen when traders are slow to adapt and focus too much on their entry point, while confirmation bias is when a trader tends to favor information that supports what they already (or want to) believe.  

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Education & Managing Emotions in Trading

Successful traders understand and recognize emotional responses and work to foster a positive mindset by controlling them. The key is developing a solid trading plan and sticking to it. This plan should include clear rules for when to enter and exit trades and solid risk management strategies, with regular review of your performance to learn from past trades, and utilizing many of the great educational resources that can be found online.

Education is a critical factor in developing a robust trading mindset. Leading prop firms recognize this and have developed in-depth courses and coaching on trading psychology. Some of these prop firms include:

‍FTMO, a leading prop firm that provides a comprehensive trading psychology program through their team of qualified Performance Coaches. These coaching sessions emphasize positive approaches, removing negative influences, and enhancing self-confidence while increasing discipline and self-analysis skills.

FTUK is another popular prop firm offering access to psychology coaches with an emphasis on developing mental resilience, emotional intelligence, and self-awareness.

The London based City Traders Imperium also provides psychology coaching alongside courses as part of their trading academy, which promises to improve emotional control and promote positive trading habits by equipping traders with helpful tools and insights.

Finally, we have Smart Prop Trader, one of the most highly rated prop firms in the industry. They offer an abundance of free educational content on their website and YouTube channel, with a special emphasis on Trading Psychology. Smart Prop Trader published a recent article on trading psychology which offers clear and practical advice on how to overcome emotional biases.  

Practice should always be a key part of your educational journey. Make sure to put what you learn to the test by trading with a demo account – this allows you to experience market ups and downs without risk, and will help you understand your emotional triggers while building confidence.

Summary

Emotional trading is natural and something all traders have will have to contend with sooner or later. However, with the right foundation, emotions don't have to control your decisions. By understanding your emotional triggers, setting clear rules, and maintaining discipline, you can significantly enhance your trading performance.

Remember, successful trading is not just about technical skills and market analysis. Always look at the bigger picture. As long as you continue to learn, grow, and adapt, you'll be in the best possible position to achieve your goals. Be patient, be disciplined, and let your knowledge, not your emotions, drive your trading decisions.