Effectively managing your emotions is one of the most important aspects of being a professional trader and is something that is often overlooked by those who are still struggling to find profitability and consistency. Even a trader with the perfect trading plan, strategy, and analytical skills can fall short and succumb to negative emotions if they don’t have the skill set to manage them in a healthy way. Ultimately, every trader should strive to be at peace with their emotions. This doesn’t mean we get rid of emotions and trade like robots, but as a professional trader it’s our job to not overreact whether things go our way or they don’t. 

Managing Emotions As A Trader

Have you ever entered a trade because you think it’s going to run without you, only to get extremely stressed out as it begins to go into drawdown, so you close it before it ever hits your stop loss level? This is a sign you are overreacting to your emotions. A disciplined trader may feel these emotions but they don’t let the emotion control them, nor let the emotion cause them to act out on impulse. This is just one of the many ways certain emotions can crop up and cause us to act in ways that are unfavorable to our consistency and sometimes our bottom line. 

Although trying to “deal with” emotions we experience by attempting not to react to them is one solution to the problem, it isn’t necessarily the best solution. As traders we should always be looking to improve upon the way we approach the markets by actively working to change our mindset into one that doesn’t cause us to feel negative emotions in the first place. If you’re having a hard time following, don’t worry. I’ll go into more detail as it relates to each of the most common pitfalls traders experience when they get into trading.

New Traders Should Focus On Learning Their Strategy First

If you’re a new trader who is still learning to trade a particular strategy, you can’t come into this getting discouraged by losing streaks or losses, nor should you think you’ve figured out the market just because you hit a winning streak. Until you have a very clear understanding of what trades you should be taking and what trades you shouldn’t be taking as dictated by your plan, I urge you not to focus so much on trying to resolve your emotions early on.

Focus on the technical side first, and once you have a basic grasp of the concepts and strategy, you can start working on your trading psychology by addressing emotions that may start to crop up. The other reason I mention this is because you’re going to need to sit down and trade a demo or small live account to collect an initial set of data to use as a baseline! Don’t expect good or bad results. Anything can happen, especially if you’re being inconsistent in the way you enter your trades or perform your analysis on the markets.

Breaking The Cycle When Things Aren’t Working

If you’re not new to trading, and you’re reading this in an effort to figure out how to stop letting your emotional reactions get the better of you and your trading, here is some advice.

First off, if you haven’t already, try taking a break. As humans sometimes we try to brute force problems in order to find a solution without realizing we’re actually just working against ourselves. This usually leads to burnout, or at some point you’ll naturally take a break because you realize it’s just not working. 

If you’ve tried taking a break, and you keep coming back to the market and things just aren’t going your way, try switching what account you’re trading (from live to demo, or a smaller live account). It’s important to identify whether or not you are letting your emotions tilt you or not. If this helps, you know it’s because of the pressure of that challenge or funded account that is affecting your ability to trade your plan the way you normally do.

If neither of the two aforementioned strategies to get out of the metaphorical “rut” that you’re in don’t work, consider evaluating your plan and doing some hindsight backtesting. This of course would be after you try taking a break to see if it was just a build up of emotions causing you to make mistakes in your analysis and execution. Again this one should be your last resort. Do your end of day markups, and collect some data on your plan so you can start building up confidence by showing yourself that there are plenty of good quality opportunities in the market for you to capitalize on.

Finally, if all else fails (and only as a last resort), go do some hindsight markups and figure out whether or not you want to tweak one or two variables in your trading plan to improve it. Notice how I am calling this the absolute last resort? This is only something that should be done when you’re absolutely sure there may be a problem with your trading plan. You should then spend at least a quarter testing it in the live market to see if there is any improvement, otherwise revert to your old plan. It’s very important not to get into the habit of tweaking your plan every week or even every month, it will only lead to inconsistency in your results.

How To Lose Like A Winner

Assuming you are not in a downward spiral or in a negative feedback loop as mentioned above, let’s talk about how to lose like a winner. Knowing how to take losses to the chin is a key part of being a trader who understands that trading is really just a game of probabilities with an edge. If you lack the understanding of how valid trade setups can result in a random series of wins and losses across a large sample size, you may not know how to “lose” properly.

Remember, we can’t expect to win every single trade, it’s extremely improbable that this will happen, no matter how good our edge or execution skills are. Losses are part of the game. If we let losses affect us by reacting to the negative emotions that are typically associated with losing, we have a big problem we need to address. When you go to a casino to play slots, do you get angry every time you don’t hit the jackpot? Probably not. So why should you get angry or upset, or even sad if you hit a losing streak (assuming you are sticking to your proven trading plan)?

Again, no one enjoys losing, but as traders we need to remember that so long as we are fully consistent in the way we do our multi-timeframe analysis and consistent in the way we enter the market, again based on data we’ve collected and put together in a plan… there is really no reason to feel bad about taking a loss. On the other hand, if we’re violating our plan left and right, revenge trading… I’d argue you should feel bad for it. One important thing to note is that for some new traders, losing control and acting out of impulse is a common pitfall they face, so while you should feel bad about it, remember that changing the way you react to losing or missing trades is a skill in and of itself.

How To Handle Losing Streaks When Trading

This takes us to our next point. Losing streaks. This is easily the hardest part to get over for most traders. Typically a loss or two or three don’t affect them all that much, but once you start to hit a large losing streak it can really shake a trader’s confidence in a bad way. Most of the time, one of three things will happen (and only one of them has a good outcome).

  1. Trader 1 will go on a losing streak and develop fear of entering the next valid setup, so they become overly apprehensive to execute on anything, and end up only taking more valid losses, missing out on the valid winning trades they needed to keep their edge and positive expectancy.
  1. Trader 2 will go on a losing streak and revenge trade taking invalid setups left and right to try to recoup their losses, resulting in a deeper losing streak and typically a larger drawdown, or by some stroke of luck they manage to recover with a completely invalid trade and get rewarded for completely deviating from their plan. Can you maybe see why this one is a dangerous scenario for the trader and their consistency?
  1. Trader 3 will go on a losing streak knowing that statistically, based on his or her system, that a valid winning trade is around the corner and they continue to execute their plan without deviating or overreacting to the previous string of losses.

See how in the third scenario, trader 3’s non-reactivity and detachment from the outcome of each trade allows the trader to remain consistent in their analysis and execution? It doesn’t leave the trader scratching their head second guessing themselves, the market, their analysis, or their trade plan. Next time you find yourself in a losing streak, try to be acutely aware of if you’re being like trader 1 or 2, and try to be more like trader 3. Calm, collected, and never deviating.

Overconfidence In Trading

On the flip side we have overconfidence in trading as a result of going on winning streaks and feeling as if we’ve “mastered the market”. This is rarely the case, but you’d be surprised! A lot of traders in Phantom even report having gone through a phase like this either early on in their trading career before joining us, or even as they are learning the Phantom Trading strategy.

Assuming you hit a winning streak because you’re only taking valid setups within your plan, you should pat yourself on the back, but not because you’re winning. You should always celebrate being consistent in your actions when it comes to trading, regardless of the outcome.

If you’re in a winning streak that is a result of taking a mixed bag of valid and invalid setups in your plan, and you’re celebrating because you’re winning, beware this is just as dangerous as revenge trading. All it takes is a little overconfidence to push us over the edge and give all of those gains back in a losing streak.

The best way to combat overconfidence is to pick a modest monthly target and if you hit it, allocate just a small portion of your gains for the month toward continuing to trade the market. If you are able to flip that allocated profit into more returns, keep doing it (so long as you continue to follow your plan), and if not, keep the remaining profit and stop trading for the month to close out in the green.

Fear of Entering A Trade

Now let’s address another super common pitfall that traders experience, especially after their first major losing streak. Fear of entering a trade. This one is difficult because if you’re trading a live account (or even demo), your confidence could be so shattered that you’re apprehensive to enter anything no matter how good the trade setup looks. This one is difficult to address, but in some cases we suggest reducing risk or moving back to a demo account and just practicing taking every single valid setup in your plan that you can find in the market so you can build your confidence back up and prove to yourself that you are capable of catching valid winning trades again.

Alternatively, we also recommend doing your end of day markups to get a pulse on the market and again prove to yourself that there are valid setups that fit within your plan that present themselves as opportunities on an almost daily basis, no matter what instrument you’re trading!

Once you’ve done this, or you start building consistency again with lowered risk or in your demo account, you can take that confidence into the live markets in your live personal or funded account and fly!

Why You Should Stop Protecting Your Ego

Surprisingly enough, the primary reason a lot of traders experience conflicting emotions is because they are oftentimes protecting their ego. If you go on a winning streak and start to believe that you know what is going to happen in the market next with absolute certainty, you have an ego problem. Same goes for things on the opposite side of the spectrum, where if you hit a losing streak you let negative self-talk convince you that you’re an incompetent trader who will never make it. 

Either way you paint it, it can be viewed as ego, a projection of one’s self image being completely out of whack, when really, from an objective perspective we are just traders who are either learning and early in our journey, or we’re overall a good trader who knows what they’re doing but is either in a rut or has lost sight of how important it is to keep a level head.

So how can we address this? This one is a bit more difficult, but we should always make an active effort to remind ourselves that we are just traders looking to execute our edge in the market through taking trades that fit within our plan, nothing more nothing less. What we think we are, whether that’s good or bad, doesn’t really matter. What matters more than anything is that we stay humble and focus on the process of remaining consistent rather than the outcome of each of our trades.

Fear of Missing Out (FOMO) in Trading

The next most common problem we’ve noticed that beginner and even novice traders struggle with in Phantom is FOMO. This emotion can actually manifest in one of several ways. The most common we’ve noticed in the community is people copying one anothers trades without doing proper analysis. This obviously is the last thing you should do. Conduct your own analysis and be responsible for your own trades! The second thing we see happen is traders chasing trades after seeing a valid or even an invalid setup play out the way they expected it to. This is no way to trade if you’re looking for consistency. 

Trading is a solo game. You should be making your own decisions based on your own analysis and have the restraint to only enter trades that are valid! Even if you miss a trade it shouldn’t bother you. Missed trades happen, it’s just like taking losses and catching winning trades.

How To Address Revenge Trading

Revenge trading in its simplest form is letting yourself succumb to an impulse, reacting to emotions you’re feeling after missing a trade or taking a loss. To control an impulse is no easy feat, and this particular pitfall will normally take a lot of effort to correct if you are already an impulsive person with poor discipline and habits outside of trading. Our recommendation for addressing revenge trading is to have clear cut rules and routines in place to stop you revenge trading before you even have the opportunity to do it.

It could be as simple as closing your tradingview window and trading terminal software for the day once you hit a couple of losing trades, or if you’re notice you’re feeling like you want to chase a trade, step away from the charts for 10-15 minutes and reset so you can approach the market from an unbiased perspective.

Fighting Your Emotions vs Embracing Your Emotions

Lastly, let’s go over what fighting your emotions versus embracing your emotions does as it relates to trading. Whether you’re trading demo, live, or even studying it’s important that we understand the difference between the two ways of managing our emotions, because only one is going to benefit us in our emotional consistency as a profitable trader in the long run.

Fighting Your Emotions

Have you ever gone swimming at a pool or at the beach when the water is cold, only to dip your feet in and decide you’re going to slowly go in because it’s uncomfortable? Then, you have your friends or family tell you to jump in, telling you that it’s “not that bad”? Being afraid to jump into a body of water because it’s too cold is a lot like fighting your emotions when trading.

As opposed to completely feeling and processing your emotions you’re stuck in this reactive mode where you’re either bottling the emotion up, or you’re allowing it to manifest in your trading by making mistakes and errors all over the place. So how do we fix this? It’s no simple task, but understand that learning to embrace your emotions like a professional trader is a skill that can be picked up and mastered over time, with experience.

Embracing Your Emotions

Embracing emotions on the other hand is a lot like accepting that the water your friends are telling you to jump into is going to be cold no matter what, but that your body will acclimate in a matter of a few seconds, meaning you’ll only feel discomfort for a brief moment before you return back to normal and start enjoying yourself. 

As it relates to trading, it means that you’re able to experience, embrace, and accept emotions as they come (and acknowledge them) but not let them take control of you in a way that leads to impulse reactions. No one on the team at Phantom Trading will ever tell you that it doesn’t suck to take a loss in the market, but should we really let our negativity bias get the better of us when we know it’s just the outcome of one of the many trades in a large series of trades we’re going to take? Remember, a traders edge will prevail over a large sample size of trades, not on a trade-by-trade basis. Losing and letting your negative emotions hijack your ability to continue to execute your plan will only hurt your consistency.

So with that, get your journal out next time you’re trading and really try to observe the emotions you’re feeling in different scenarios, from wins, to break-even trades, and losses… without judgment.

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Robert Castillo
FX Trader & Analyst
Writer & Editor

Rob is a funded trader from Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading, he enjoys making music, boxing, and riding motorcycles.