Emotional risk management

The importance of emotional risk management

We are fully aware of the fact that we push you to the limit to fully understand risk management.

In our briefings, here in the channels and also in our Trading Room. But there is even more!

Have you ever heard of emotional risk management?

Primarily it is about recognising and understanding your own responses to psychological threats and how to manage this.

Day traders must control their emotions all the time, actually, they should have no emotions at all. The slightest lapse in controlling your emotions will completely ruin your hard-earned profits.

For instance, after having several losses in a trading session you are afraid of ending up having a losing day. This fear spurs you to over-leverage and blow up your trading account with a single trade.

How many times have you blown up your trading account because you lost control of your emotions by revenge trades, high leveraged trades, etc.

“Markets are going up at the moment so forget about risk management and get yourself over-exposed in the markets”. Most of our Margin Traders understand that trading is a game based on probabilities instead of expectations. We know that we should control our emotions and stay detached from the results of each individual trade.

We always say: don’t marry your position. Take profit at targets, use a stoploss and accept the risk. Do not be affected by fear and greed but try to stay in the “trading zone”.

While these clear statements are good reminders, they are of little practical value yet. This is because they do not show you the exact action you need to take when you are actually trading.

Day trading requires full focus. The day trading setups are volatile often so it is crucial for day traders to know exactly how to act to control their emotions while trading.

Now, the main question is: What can you do to control your emotions?


Margin Traders tips: 

  • Take a break after each trade. Take a walk, grab a cup of coffee or any other activity you can do to get yourself away from your computer. Even if it’s just for a few minutes. Trading is very high tense so getting trapped in emotions is always just around the corner. The physical action that you take to control your trading pace is so important. This simple act clears your mind and reminds you that you are in control, and not your computer.
  • What is the most boring hour of the day in the markets? When you found out what that moment is: why should you stay put behind your desk? Walk the dog, read a book, have fun and enjoy your surroundings. This is because most day trading strategies work best when price action is volatile. Trying to trade when a congested market leads to frustration, anger and impatience. And these are the emotions you would like to avoid.
  • After how many losses will you take a break?
    Consecutive wins make you feel like a super trader. You will think you are not able to lose. You actually feel invincible. You over-leverage and over-trade. On the other hand, 3 consecutive losses make you feel like a loser. You do not want to lose. Your emotions are about to explode and eventually you will revenge trade to gain back your losses. When this happens it is tough not to get affected by these emotions. You can prevent this problem by stop trading the markets after 3 consecutive wins or losses.

There barely is a bigger factor that causes a greater surge of emotions than your profit and loss figure. To many traders, the profit and loss figure is an expression of their self-worth. Sticking to your risk reward plan prevents this. If this is all set in your trade, there is absolutely no need to sneekpeek at the figures all the time on your cellphone.

Something that might help as well is the following thought: When you are in a winning trade, you may compound and enlarge your position. So why not take a break when you experience a losing streak? Take a break, recap your trading journal, recap your trading rules and trade a bit lighter (smaller position size) to build some confidence. Because confidence is what you need.

Control over your emotions does not give you a trading edge. This is because your trading edge depends on your trading method. However, you need to master your emotions for long-term trading success.

Learning to fully control your emotions requires persistence, the correct mindset and the discipline to apply those factors at any given time. Determine your boundry by designing a way of trading that protects you from your emotions and stick to that system will help you to protect your portfolio.

Finally we can only advice you once more: read about this subject as much as possible. There are very good books written by experienced traders like Mark Douglas and good articles like via the following link: https://capital.com/emotions-in-trading

Emotional Risk Management

This image will help you to enjoy your profits even more and to accept you losses even better.

Happy trading!

Team Margin Traders


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