Fact. We are humans. We get emotional. If we lose, we feel bad. If we win, we feel good. If we are showing an unrealised gain, we are anxious that we might give it back, and are tempted to close out early. If we are showing an unrealised loss, we are tempted to hold on in “hope” that the trade will turn around. Instead of trying to eliminate emotions, we just need to accept them and plan around them. It’s simpler than you might think.
Know your strategy. Thorough backtesting and forward testing will give you all the information you need to manage emotions. The win/lose and risk/reward ratio are two key bits of information I use to plan my money strategy, which in turn keeps my emotions in check. The results for my personal strategy show a 60/40 win/lose ratio, and an average 1:1.25 risk/reward ratio. My risk/reward can range from 1:1 up to 1:2.5, dependent on the final profit target achieved for a particular position.
Based on these figures I know that over 100 trades I will win 60 trades for a 1:1.25 risk/reward, and lose 40 trades at 1:1 risk/reward, for an outcome that adds 35% to my capital. In addition, I know that I will lose 40 trades in total, and can absorb this in the stop-loss used. Hence, a 2.5% stop-loss will allow me to absorb 40 losing trades in a row before account funds are blown. So when I enter a trade my mindset tells me that even if this trade does not work out, overall I can’t lose…my historical strategy results support this mindset. This is a numbers game, not a mind game!
If you want to control emotion, know your strategy!