As most trading psychologists will tell you, our emotions can play a big role in our trading decisions.
It will be clear to budding trading psychologists that a bad trade can make you feel upset, and possibly lead you to act in a destructive, emotive manner.
An example of this is the trader who decides to hold onto a losing trade out of pride, or fear of having to admit that he or she must take a loss.
On the other hand, a trade that’s going well will make the trader feel happy, and either lead to positive consequences (quitting while you’re ahead) or negative consequences (growing overconfident).
One aspect many trading psychologists fail to examine, however, is the impact of our emotions at the beginning of – and even before – a trade.
That is, not just the emotional response we get from a market development, but the emotional bias we put into deciding on a trade.
Beginning with bias
Research has shown that traders will slant their estimate of risk going into a trade based on cognitive biases and emotional reactions.
This mind-set can influence our perception of financial data. Strangely, we see this happening often with traders who have been playing the market for a while.
Experienced traders may have seen a trade go one way nine times out of ten based on a similar set of circumstances.
So, when these circumstances crop up in the market, the trader feels that they already know what these circumstances mean.
Maybe so; but maybe not. The trader is coming into the trade with a bias based on a general feeling, and may not be taking into account all of the particulars.
Stay alert
Part of trading is having an awareness of the overall market. Humans are intuitive, and are capable of sensing subtle market patterns.
If you’re biased or emotionally aroused going into your trading decision-making, however, you may be blind to these subtle market patterns.
Biases and emotions can mask little warnings signs going into a trade, and cloud our view of new market relationships.
The way the market works is complex, and that’s why you need to have your feelers out to sense all these factors.
Keeping emotions and bias in line
It’s ridiculous to think that every trader works without emotion, because emotions are part of our psyche.
That is, emotion should be used constructively. Emotion is usually key to being a trader, because you need the drive to trade in the first place.
It’s all about keeping focus and leaving your biases at the door. The point is not to reduce emotion, but channel it in a way that builds consciousness, not reduces it.
So, remember, even before entering a trade, check whether your mind-set could lead you to cloud your judgment as you’re mulling over the data.
Mostly, ensure that you are conscious of all of the available data, and not letting excitement lead you to overlook bad signals – or negativity to overlook good ones.
Look at each new trade as a fresh trade, no matter how it might look like a textbook-copy of an old one, and remember that although history can repeat itself, new events can rewrite history.