If you want to make money in trading, it is important to remove emotions from trading. Why is it crucial for success in trading? Let me share with you facts from a study. Science Magazine conducted a study and proved that financial stress makes people lose 13% of their IQ points. That in turn leads people to make rash impulsive decisions and incur losses. That’s how emotions in trading cost you. But the question is how to remove emotions from trading.
10 simple steps to remove all emotions from trading?
Follow the following 10 simple steps to remove emotions from trading.
1. Try not to look at your portfolio on a daily basis
According to Daniel Crosby, looking too often at your portfolio is terrifying. Crosby is a behavioral finance expert who also says that limited looking at your portfolio makes you feel secure and confident. When you are not under stress, you make better decisions.
2. Move with the market
Financial markets behave in a very mysterious way. You cannot expect the market to behave how you like or prefer it to behave. Therefore, it is important to move with the market. Additionally, understanding how markets behave is the key to removing emotions from trading.
3. Don’t develop a bond with your financial assets
The golden rule is that you are in the market to make money, not to love or hate anything. Developing emotional ties with any financial instrument makes your wrong decisions. Just sell your assets when you are in profit and move on because there are many opportunities waiting for you.
4. Don’t feel FOMO
Have you heard about “FOMO”? FOMO is an abbreviation of Fear of missing out. If you can’t catch the train in time, don’t waste your energy by running after it. It is prudent to wait for the next one. Similarly, if you miss a good profitable opportunity, don’t jump in because of FOMO.
5. Don’t follow the herd
Can you follow a herd to fall into a trap? I don’t think so. Similarly, you shouldn’t follow the herd when trading or investing. It feels enticing to invest where your friends or family members are investing. Instead, do your own research and base your decisions on pure technical indicators. It is only you who is responsible for what you lose. So, keep that in mind and make decisions that suit your strategy and style of trading.
6. Risk as much as you can afford to lose
Risking as much capital as you can afford to lose helps greatly in removing emotions from trading. When you have your financial stability detached from trading, you stay calm and make rational decisions. On the other hand, if you are relying on your trading income, you may make irrational decisions to make quick money. However, that quick money never realizes and only brings losses for you.
7. Base your decisions on technical and fundamental analysis
Fundamental and technical analyses are the best tools to remove emotions from trading. Can you imagine making investment decisions based on what you like or don’t? Now imagine investment decisions based purely on pure fundamental and technical analysis. Additionally, when you are determined to make decisions based on analyses, it automatically removes emotions from trading.
8. Follow your strategy at all costs
If you have a trading strategy that is working well for you, you are on the right track. However, the temptation to earn more and earn quickly can make you derail. However, the key is to follow your strategy at all costs. It doesn’t mean that you cannot and should tweak a bit from time to time for better earnings. The point is to always follow a proven strategy.
9. Don’t over-expose your capital to one financial asset
Some traders find a profitable trading opportunity and over-expose their capital to that one asset. However, this is a wrong practice no matter how confident you are. What if your intuition or your analysis is wrong? You wouldn’t be able to recover your losses. Therefore, it is always better to take a limited risk.
Diversification is a virtue in trading for me. When you have assets from different classes, you are in control. Some assets will perform better today, and some tomorrow. The overall score on average remains great. However, putting all eggs in one basket is detrimental and can lead to catastrophic ends in trading. Therefore, diversify your portfolio because it is the key to staying in the game over the long run.