How Are Your Moods Impacting Your Trading Performance?
You have just selected “up” on a High/Low 60 Second binary options trade. Over the next minute, you watch with bated breath as the price rises and falls. Will you lose or will you win? Only time will tell.
How do you feel in this situation? Do you feel nervous, like maybe you should have skipped this trade, or do you feel excited at the thought of the profits you will win in just 60 seconds? Are you terrified of losing? Confident in winning? Thrilled by the uncertainty of the moment?
Trading can elicit a wide range of emotional responses. Those responses can easily become quite messy and confused. Part of trading psychology is learning how to identify your own emotional responses and interpret them. The better you understand your reactions to market events, the easier it is to curb excessive emotions and stop them from dictating your actions. Trading emotionally can be very dangerous to your profitability.
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This does not mean you can simply “leave emotions at the door!” It is very important to understand that up-front. You are not and never will be a robot. Even if you have a pretty grip on yourself, you will always feel something when you trade, and that is not necessarily a negative. The trick is just to make sure that the emotions you do feel are in check, and that you can identify rational from irrational thoughts. To examine why emotionally based decision making is a bad idea for a binary options trader, we will take a look at a variety of emotions and how they can impact you in adverse way.
Fear is probably the single most challenging emotion for most traders to deal with, in that it can be crippling and very hard to overcome. Trading is an activity where you never really know what is going to happen next. You can lean on your trading method and your statistics from testing to guide you, but you never can be 100% certain that you are not going to lose that next trade—especially if you recently have been down on your luck.
Here are just a few of the bad decisions that fear can cause you to make as a trader:
- Fear may stop you from taking perfectly good trade setups. This can prevent you from collecting the profits you need to succeed. It can throw off your statistics as well, and make you wonder why you are not achieving the win percentage you should. This can further erode your confidence, feeding your fear.
- If you are afraid, you may regret getting into even the best trades, and may be tempted to exit early when you should not. This can cause you to lose trades you should have won, or collect small partial profits that do not amount to much.
- Your fear that your trading method is no longer working may cause you to abandon it, even if it is a working system or could be with minor adjustments. You may waste all your time and effort pursuing a new system, and may constantly give up on what you do find out of fear that you are going to fail yet again.
- You might just stop trading altogether—or never begin! For some traders, fear of failure is so crippling that they never begin trading at all, even though they have done the testing and are more than ready.
You can easily see how fear can be one of the most damaging emotions you ever face as a binary options trader. Fear paralyzes you, and tricks you into believing that you are always walking on ground which is about to erode under your feet—even when you are walking on solid ground. The result? You abandon sturdy pathways and try your luck on even more unstable ground, or you just sit down and refuse to move forward.
When you lose a binary options trade, do you feel the urge to get back at the market? Do you feel like the market has personally wronged you, and is out to get you and take all your profits away? When you lose your head in the heat of battle, things can go horribly awry. Here are the kinds of bad decisions that anger can spawn:
- Compromising on trade setups. When you get angry, you also get impatient. When you get impatient, you jump into trades you should forego. A trader who is in a hurry to get back at the market and reclaim lost profits may take “B” setups instead of the “A” setups he would normally stick with. This can lead to greater losses.
- Taking too many trades at once. An upset trader may also jump into more trades than she can handle simultaneously. The last thing you want to do for example is get out of a 60 Second trade, lose money, get angry, and then out of revenge, enter three 60 Second options at once.
- Investing too much. “If I could just win one really big trade, I could get back everything I lost on the past four trades, and then I can get back on track!” This common misapprehension is really bad news. All it is likely to lead to is doubling your losses in a single trade.
Anger is not the only common response to losing trades. Anger is a state of heightened energy. Sometimes you experience the opposite—a loss of energy and momentum. Instead of feeling a rush of false “can do,” you instead feel a slump of “cannot.” If you are prone to depressive feelings in your life in general, you will probably be prone to despair. Here is what can happen when you get depressed as a trader:
- You may feel an urge to give up on your trading method, or some other important aspect of your trading plan. This can result in a lot of lost money and time. When you are prone to despair, you are also prone to mistrust. You may never learn to trust your trading method, and even if you had a great working plan, you may throw it away. It is easy to see how this can become a self-perpetuating loop quickly.
- Stress may turn to burnout, and you may feel tempted to throw in the towel altogether. Despair can easily make you want to give up on binary options trading completely. It is a common cause for burnout. Most traders who wash out of trading (and the majority do, sooner or later) give up because they believe they will never make it.
Envy is wanting what somebody else has. Generally speaking, there is nothing wrong with wanting the same profitability that another trader has, but if you get carried way with the wanting, you may become impatient and start making foolish choices.
- The envious trader may think that if he simply borrows another trader’s method, that it will suddenly result in success—or that if he copies another trader’s moves, that will also result in profits. Social trading can be useful, and there are few better ways to pick and learn a method than by looking at what successful traders are doing. That being said, there is nothing automatic about the process. It is important to recognize that it takes time to master a system, and that a system that works for someone else may not be the right one for you.
- If you are envious, you may feel a competitive urge, or an urge to show off. After all, you want other people to want what you have when you become successful. Unfortunately, it is easy to forget that first you actually have to be successful. You may be in a hurry to make other people as envious as you are, and may try to showcase inferior trading skills. You may constantly be trying to win more trades or bigger trades, all while losing sight of what trading is really about. This can result in more losses and bigger losses.
I have read a lot of articles on trading that delve into the dangers of fear and anger, but very few that talk about envy. I think it is a very serious problem for some traders. The evidence of that can be found in the marketing campaigns of binary options brokers as well as trading signals and auto-traders.
Why else would so many advertisements assert that you could “Make $10,000 a month and spend all your time relaxing on the beach while our software does the hard work for you?” There is a very clear mental image there. A lot of traders can picture that imaginary successful trader who lounges around on the beach quite clearly in their minds. They want to be that person, and they want what he has. These promotions take advantage of that envy and the emotional muddle it creates.
Another emotion that I do not see a lot of commentary on is boredom. Boredom may not be a problem for everyone, but for some traders it can be lethal. Whether or not you become bored as a trader depends on your disposition, your trading schedule, and other factors. A lot of people find trading somewhat tedious, even if they like it. This is because of the inherent repetitious nature of trading. By definition, trading will be repetitious if you do it well, because you are searching for patterns and trying to only place trades that fall within those highly predictable blueprints.
Some people hate predictability. It drives them crazy. It makes them long for surprises. Others simply have trouble with staring at little bars on a screen for hours on end. Here are some of the pitfalls that can go with boredom:
- Bored traders search desperately for something to break up the time, including trades. They try to justify trade setups so that they have something to do. They take “B” trades or even worse trades, just so they will stop feeling so bored. Even though this may result in losses, it gives them some kind of emotional stimulation. Even desperation and anger can be addictive.
- If you get bored easily with trading, you may shirk your responsibilities. Instead of sticking with your schedule and watching the charts, you may decide to watch TV instead. No trading gets done, no money gets made, and you become ever more frustrated. You also may feel the dangerous temptation to watch TV while you watch the charts. The next thing you know, your attention is split, and you may make a stupid decision because your brain is not entirely focused on what you are supposed to be doing.
Boredom can be easy to alleviate for some people and a challenge for others. It may simply be enough to get up and go for a brief walk, or take regular short breaks. You may never 100% eliminate it; learning to deal with a certain level of tediousness is essential to succeed in any job role.
Thrill is an emotion which in a way is the treacherous flipside of boredom. People who struggle with boredom sometimes become addicted to wild swings of emotion. The ups and downs of winning and losing trade after trade can be stimulating. There are generally going to be more downs than ups, but this just makes the occasional victory taste all the sweeter.
If you become addicted to the thrill of trading, you might engage in any of the following problematic behaviors:
- Taking trades which do not fit your trading criteria.
- Trading without any trading criteria at all. You may feel like it is just fine to give your trust to Lady Luck and wait to see what will happen. Lady Luck is a greedy mistress, however, and she will drain you dry.
- You may become a compulsive gambler. This is one of the worst things that can happen to you as a trader, whether you decided to trade seriously for profit or just for fun. Compulsive gambling can destroy not only your trading, but your life.
Not all emotions which can adversely affect your trading are negative. Some are actually positive. Triumph is a wonderful experience, and you should allow yourself to bask in the glow of victory when you win a trade. But when this emotion becomes unbalanced, it can turn to conceit.
- When you are on a winning streak, you may think that your system rules are not so important, or that you can handle a lot of trades at once, even if you really cannot. This can cause you to start overtrading in earnest, and at that point, you can lose control, and triumph can turn to defeat. Conceit is not the same thing as optimism!
- Some traders may even be tempted to do the exact opposite and start trading less. This is the desire to rest on one’s laurels. Alternately, you may keep trading, but may feel like you no longer need to research or test or work on improvements. While there is nothing wrong with taking a break now and again, eventually you should get back to it. Eventually there will be some kind of change in the market, and you will need to be ready for it.
- When you do find yourself losing again after you have become very comfortable with your wins, you may be so thrown off balance that you despair. While winning is good, it is not something which should ever be taken for granted, and it is good to remember how to get up when you fall.
These are just a few of the emotions which can go to your head while you are trading. Any one of them can prompt you to make foolhardy choices you would never otherwise consider while you are trading in the right frame of mind. Emotions can get messy fast because it is easy for them to start piling up on each other. Anger can turn to impatience, boredom to thrill-seeking, envy to conceit, fear to despair.
Once you learn to recognize your own emotional weaknesses and triggers, you can take steps to control them. You can come up with an action plan (or inaction plan) for the next time you start to feel a wave of irrational anger or despair or any other emotion get in your way. That way you can cool down and get back to trading when you are more levelheaded and able to make smart, rational choices that are based firmly in logic and grounded in testing.