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§7.1 Traders’ emotions and their impact on options trading

When speaking about exchange trading you cannot miss such an important component as emotions. Traders often mistakenly believe that charts and trading strategies are of the most importance. However practice shows that it is quite the contrary. According to experts, a strategy accounts for 10% in terms of the payout of a binary options trader. It follows that you don’t need to have a super intellect in mathematics to trade successfully. Factors such as trading psychology and capital management account for 60% and 30% respectively. We have already discussed capital management in details. As for trading psychology, it is time to learn more about the subject which is very important for every trader.

If you do not follow your trading strategy to the full extent then it does not matter how good your trading strategy is. Experience shows that it is not an easy task for every trader. If you make trades against your trading strategy which you have selected for yourself then you will most likely not be able to win but will also learn nothing from it.

What kinds of feelings and emotions have the most negative impact on a trader and prevent him from winning?

Emotions of fear

эмоции трейдера - страх

Fear is one of the strongest emotions. From a trader’s point of view it is primarily a fear of losing. Nevertheless a fear of losing means losses for a trader more often than not. For example, when your trading strategy signals you to make a trade but you have a fear that it will turn out to be unprofitable and you reject the trade without good reason or reduce value of the options substantially to minimize your losses. However it is the quickest way to making little profits. Therefore the emotion of fear is one of the most destructive for a strategy.

These emotions are even more evident when you lose one or two trades and don’t wish to make any new ones. It also means that you deviated from a trading strategy because no one strategy will guarantee absolute profitability. That’s why a trader must not lose his enthusiasm in the case of a loss because continuous progress is the only key to future winnings.

Emotions of greed

эмоции трейдера - жадностьThese emotions have an opposite impact on traders but in fact they have the same or, maybe, even more destructive effects. For example, if you make a trade which can cause you to lose more funds on your deposit than you’re allowed to and lose your funds; it can be called greed because you are trying to earn a large sum of money instantly. By doing this you will lose a lot of money since the losses incurred in one trade will exceed most of your previous profits.

Another kind of greed is buying an option which has no chance to expire in-the-money. Some traders will buy it anyway because when they are very greedy they hold onto any signals even weak ones and don’t follow strategy to make profit. It is clear that it will also end badly.

Emotions of ego

эмоции трейдера - азарт

These emotions are easy to determine because they are the strongest ones. In particular, when a trader loses his enthusiasm after a loss, he expresses both his fear of further losses and ego. In other words he considers mistakes made by the trading strategy as his own. As we know, the strategy allows a certain number of losses, and it is not worrisome but if a trader personalizes the loss it will continue as source of uncertainty until he abandons trading entirely.

Another popular scenario when

Another popular scenario when emotions of ego affect trading is when you wish to win back immediately to prove to yourself that you are an established trader. However, a real established trader will never make new trades at once to cover losses on previous trades if only because he understands that it never helps. That’s why the worst thing that a trader can do is to trade out of revenge on a previous failure. Whatever happens, you should not worry or personalize any failure. When you trade you will always have good and bad luck. Any kind of luck is good in its way because failures will polish up your skills and teach you to understand how to trade to win more often. If you take an interest in all the aspects of trading as a researcher instead of a consumer then the market will welcome you much faster and allow you to earn incomparable profits.Emotions caused by a successful trade are often not much better because they feed your ego and evoke a false sense that you will succeed every time and in everything, which stimulates you to take unconventional action. Generally speaking, the circle of actions based on the principle of “winning trade – one more trade – losing trade – wish to win back – losing trade” can be closed. As a result, you’ll find yourself losing your deposit. For this reason it is recommended that you should learn to control your emotions so that they don’t control you.

§7.2 Concept of the “comfort zone”→