Don’t Avoid Your Trading Emotions, Learn to Manage Them

October 01, 2017 09:00

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Dear traders,

When your hard earned money is on the line, it isn't always easy to remain 'calm and reserved'. In fact, it's very logical to get nervous, but unfortunately, emotions tend to block us rather than help us.

This article explains why avoiding emotions is not possible, but it does offer a guide to how to manage our trading bias with more vision.

Check out why creating a trading bias is the key to successful trading, but also learn how traders need to a) set key levels and b) stay flexible in the process.

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Analysis and Trades Create Emotions and Bias

The simple fact of the matter is that analysis will automatically create a trading bias with traders. This is to be expected and should not be suppressed. In fact, avoiding emotions is not only unrealistic, but also unproductive.

Why? The first reason is because we are all human beings who thrive due to our emotions and connections with others. The second aspect is that having a trading bias is needed for trading purposes.

When I have a trading bias in place for a setup, I have the determination to take the trade, manage the setup, and close it appropriately. Living through a setup from start to end becomes much more difficult without this bias.

Some traders might notice their system does not create any trading bias but I beg to differ. In my view, all analysis creates a trading bias IF you want to trade with it. In fact, the main purpose of creating analysis is to identify whether you are bearish, bullish, or sitting on the sidelines and then trade that analysis (bias). Why else would you do analysis?

A trader lacking trading bias will not enter a trade or they will exit too quickly lacking conviction for any setup. My first conclusion therefore is simple: trading bias is a natural part of analysing the charts and a must for trading.

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Image Source: USD/CAD 4-hour chart from 30 June to 26 September 2017.

What is Your Trading Bias Based on?

The most important aspect of trading is not about removing your emotions or trading bias, but about managing and improving your trading bias.

Starting out as a beginner trader, your trading bias will be based on many aspects which could have little to no relevance. You might be:

  1. Focussed on some news updates or rumours, but see the price do the opposite of the expected.
  2. Scared of a small bearish candle that represents indecision rather than a trend change.

This is not a beginner's fault. It's a natural learning process, the same we go through with languages, music, or sport.

A beginner trader will have an "untrained" bias, which creates a 'false' sense of understanding due to the lack of experience. Basically, their reactions are mostly based on luck, fear, insecurity, or other (negative) emotions.

The good news is that traders can improve their outlook, analysis, and trading bias when they gain more insight and understanding of the market. The building blocks for fueling such improvement rest primarily on experience and education.

When you just start trading, the progress might seem almost non-existent, but eventually, you will recognise the market structure and price patterns. You will be able to understand impulse and correction, which are the building blocks of the market movement. You will see how the price repeats its movements in waves and as a Fractal of other price moves.

All of this will provide traders with a road map within the market structure. It will also allow you to have a flexible trading plan which is adaptable to new market information. Above all, it will reduce your nervousness and fear (watch the video below) when analysing and trading the markets because traders will know that they are in control of their trading plan, but not in control of the market movements.

Proper Role of Strategy and Trading Plans

Your trading plan is the translation of your analysis into actual trading decisions. It summarises a trader's strategy into actual tactical decisions about entries and exits.

In a certain way, a trading plan needs to prevent traders from entering when the trading bias is incorrect and lets you enter when the bias is correct. This can be done by using invalidation and confirmation levels.

A well-balanced trading system uses invalidation and confirmation to help recognise when your analysis is on track (the price is moving to your level as expected) or whether it's moving into the opposite direction (your analysis is invalidated).

Cheers and safe trading,

Chris Svorcik

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