Though emotions greatly influence our decision-making, it’s best to take a rational approach when trading. Here are a few reasons why being ‘cold-hearted’ and controlling your emotions in trading can benefit you.
In financial terms, overtrading refers to the excessive buying or selling of financial instruments. It occurs when a trader has too many open positions or spends too much on one trade.
In most cases, traders overtrade due to their desire to make up for losses. It could also be the other way around — wanting more potential gains when the trades are going well.
Market behaviour is also a contributing factor to overtrading. When prices move rapidly, traders get tempted to place positions without thinking as they try to maximise profit.
Due to overtrading, a trader may lose focus on their trading plan and strategy, which could lead to significant losses later on.
How to prevent overtrading
The best way to prevent overtrading is to practise strict self-discipline in your trades. Maintaining a trading plan and adhering to a risk management strategy is essential.
A way to minimise risk is diversifying your portfolio since you allocate your capital across different assets. As they say, don’t put all your eggs in one basket. Also, keep your capital under control — only risk what you can afford to lose.
Lessens risk exposure
Trading involves risks regardless of the market a trader taps into. While strategies can mitigate the risks, trading under the influence of emotions will lead to biased decisions, exposing you to unnecessary risks you may not be prepared for.
When a market is bullish, some traders fear missing out on big trading opportunities if they don’t act. If they do, they are at a risk of overlooking the fundamentals of trading, including assessing how a particular asset behaves. Fear of missing out leads to greed, which makes a trader disregard signals to sell, hoping for a more significant win but incurring losses instead.
How to manage risk exposure and the fear of missing out
A great tool to combat the fear of missing out is to have a trading plan. By establishing a trading plan, you can remain focused on your objectives and stay on track with your trading strategies. However, your trading plan should cover all possible scenarios since it will serve as your guide to avoid risking too much capital or entering trades at the wrong time, especially when the market is moving in your favour.
It’s crucial to keep your emotions under control as market conditions constantly change. Avoid letting the current trend sway you.
Reduces revenge trading
Revenge trading refers to a trader’s emotional response to a significant loss. Right after the loss, the trader enters another trade without thinking through their next steps or reviewing their strategy in the hope of recovering it immediately. It’s a reaction triggered by disappointment over the substantial loss.
The intense desire to overcome a loss quickly can drive a trader to act on impulse, causing them to overtrade, resulting in more harm than good. Some traders incorporate revenge trading into their strategy, but many have lost fortunes due to its erratic nature.
How to avoid revenge trading
Using risk-management features like stop loss is an effective method of preventing revenge trading. However, this feature works differently when trading CFDs and multipliers.
In CFD trading, stop loss enables you to minimise potential losses by setting a price at which the position will be closed automatically if the market moves against you. While with multipliers, stop loss allows you to set the exact amount you’re willing to risk. Your trade will be closed automatically when your loss equals or exceeds your stop loss amount.
It is also helpful to keep a trading journal and follow a routine. A trading journal will provide a record of your trading activities, which can help you become a more disciplined trader. Establishing a routine will aid you in developing a trading habit that will allow you to achieve your long-term trading goals.
A key to successful trading is keeping your emotions in check. Otherwise, it’ll only lead to self-harm and financial ruin. Practising your trading skills with a demo account will help you avoid committing any of the pitfalls listed above. Don’t have one yet? Sign up now!