How to Avoid Emotional Rollercoaster in Trading

There are vivid ways of how emotions manifest themselves in trading. When we make money, we feel that “we get it,” we have the power, and we’re the kings of the game. However, when we lose money, it feels like life can’t get any worse! 

The main reason for the emotional rollercoaster is unrealistic expectations. Your expectations as a trader include the definition of day-to-day success, the specifics of your workflow intensity, and the kind of learning curve along with the results that you’ll have in trading.

To have peace, you must align your expectations with the realities of trading.

Down below, let’s look at the most common, wrong expectations that traders encounter, especially at the beginning of their careers.

You have to make money to have a “good day”

Many new traders would struggle with the feeling of failure if they finished a trading day in the red. Having such an attitude makes their emotional state fluctuate along with their P&L. It results in poor judgment after losses, specifically when traders need to be at their best to utilize the next excellent trading opportunity!

How do you define a good day, week, month, or year in trading? While it’s logical to expect profits over timeframes such as a quarter or a year (Why do we do any business anyway?), the probabilistic nature of trading requires us to have a particular attitude in the interim.

Put it into perspective 

Think of it in this way. The reason why you would make money in trading is that you have some edge. The edge typically will either allow you to be right a decent percentage of attempts (over 50%) or offer a high reward-to-risk ratio. 

Now, even if you have a 70%-win rate, it doesn’t mean you will be right seven times out of ten. That means you’ll be right 70 times out of 100! If you’re wrong 30 times, likely you’d be wrong up to 5 consecutive times! How will you handle yourself emotionally during those “necessary losses”? Will you allow your mental state to affect your edge? 

Only after you perform the number of trades that’s sufficient for a statistical sample (50-100) can you expect profits from the execution of your system.

If you’re a day trader, and you make five trades per day on average, it would take you at least two working weeks to expect “logical” profits. 

What if you’re a swing trader? You can expect to be profitable every quarter or half a year. 

Can you see now how illogical it is to be mad about a day in the negative? If you’re still obsessed with being profitable every single day, be a poker-face scalper making 50-100 trades per day. If you decide to jump into it, I dare you to consider the costs to your lifestyle. 

Set the right goals

To maintain the right mental state consistently, set the right daily goals for your trading. You already see that they aren’t about profits. The reasonable goal would be to follow all of the rules of your system and observe daily trading routines. Focus on the process, not the profits. Your goals should be in your control, and that doesn’t include the positive outcome of any individual trade.

Working harder means taking more trades 

“Working hard” should be clarified in trading. In many other fields, the more we do, the better the results are. If you’re waiting tables, the more hours you’re working, the more tables you can serve, therefore you’ll be paid hourly more and likely you’ll earn more tips. 

In trading, we must be careful about how we spend our time. It’s natural to think that better results are about taking more trades. While there is some truth in it, if you’re more of a discretionary trader, focusing on the quantity rather than quality often leads to overtrading and diluting your edge. 

Trading is about pattern recognition, trade, and risk management. Those are highly dependent on your physical and emotional state, if only you don’t let the algorithm trade for you. I encourage you to be humble about the consistency of the quality of your judgment. 

Learn to say “no” to potential opportunities. Be highly selective about your trades. Only in this way, you’ll manage to maintain your edge and survive in the long run. 

Here is a little trick for you. Before taking any trade, imagine that you’re paying upfront the amount of risk you’re taking (including the commission) to get the potential profit. Would that setup still be worth investing in?

I will make money in the first week of trading

Many new traders that are successful in other careers think they will be successful in the same way in trading. Just put in the hard work, and there you go! Trading requires an entirely different set of skills than most of the other careers. It takes time to develop those skills. Top professionals in other jobs spend years in their fields on building the skills that enable them to make high returns. In this sense, trading is not different.

Many new traders get lured into trading, thinking it’s the fastest way to make a fortune. 

The internet is full of misleading information about trading. Social media and so-called trading gurus, “Magic” indicators, and trading systems for sale are just a few bits of such information. New traders overestimate what their careers are going to look like, having an unrealistic timeframe when they are trying to do it on their own.

Successful traders are not born. You must invest your time and efforts to get meaningful results. Even if you have a great mentor, it can take several months to see any signs of consistent profits.

Summing up

Traders do experience emotional rollercoasters when their expectations don’t align with the reality of trading. To have the right expectations, you must get acquainted with the nature of the trading business. It’s a performance-based activity, where the results are dependent on the probability factor. There are certain implications to the specifics of work associated with the law of large numbers, and traders must be aware of it. Focus on the quality of your trading setups to keep your edge alive. 

Prepare for the marathon, not a sprint in trading. Just like in other careers, meaningful returns don’t come without the investment of a considerable amount of time upfront.