3 Steps to Manage Emotions When Trading

Effective trading can be a great way to generate lots of money with the simple click of a button. Depending on one’s trading style, execution can be quite simple and easy. The challenging part for most new traders is the ability to manage emotions. Once there’s serious money on the line, the markets have a way of messing with your mind.

Common symptoms consist of buying tops during peak hype and panic selling the dips. Others lose money by not acknowledging the downside risk and having an exit strategy should the trade fail. If your trading career is an emotional roller coaster ride of getting rekt then here are three steps to help you on your journey. 

#1: Slowly Build Up Your Risk Tolerance 

Perhaps you were attracted to trading because you wanted fast and easy money. Although trading can accelerate the growth of your portfolio, it still takes time to build up profitable habits. Just like any other skill, one must put in the time to master their craft. 

The biggest mistake new traders make is to go in too big, too soon. They want instant gratification and bet the house to get it. The problem with this approach is that your mind needs to be conditioned for that level of risk tolerance. Similar to working out, if you’re just starting you likely won’t be able to handle benching 400 pounds without injury. In trading, injuries are reflected by your portfolio balance and confidence levels. If your nerves are shot from trading then there’s a good chance your position size is too large.

As a new trader you’ll want to slowly condition your mind to handle risk. First start off my practising with small amounts just to get a sense for market behaviour. Although the risk is small, using real capital is preferable to paper trading because it helps build tolerance with actual skin in the game. 

Once you increase your win ratio with small size, you can slowly increase the intensity to build up your confidence levels. Get in the habit of making consistent gains to know yourself as a trader so you can swing with larger positions without a sweat. Position sizing is always relative to the overall percentage of your portfolio. 

#2: Master One Strategy 

When learning to trade it may be tempting to always be chasing some form of “silver bullet” analysis or magical indicator. The best traders tend to use a very simple approach to make money. Cluttered charts can be a way of overcompensating for a lack of confidence. Sometimes traders can get paralysis by analysis.

I tend to view trading like martial arts… if someone attacks me on the street I want to use a simple and effective strategy for neutralizing an opponent. Real self-defence differs from all the flashy tricks seen in the movies. The main goal should be getting the job done as quickly as possible, the more time spent on a cardio workout, the higher the chances of losing stamina and the fight. Why use a spinning tornado kick when a simple stomp to the kneecap can do the trick?

I fear not the man who has practised 10,000 kicks once, but the man who has practised one kick 10,000 times. 

-Bruce Lee 

In trading your main goal is to make money. The fastest way to achieve this goal is to pick one strategy and master it. At first you may have to explore different strategies to find the one that suits your nature.

Once you find your preferred strategy you’ll need to stay disciplined and only trade market conditions that are suitable to it. Professional traders understand that money isn’t made in the execution but in the waiting. Good traders will stalk price action like a panther slowly creeping up on its prey. 

Disciplined crypto traders only need a few big trades a year to make their salary. This can free up time and increase your win ratio. By mastering one strategy you’ll build up the confidence to swing with heavier size when an opportunity screams at you. 

#3: Self-Analysis 

Trading can have a way of amplifying your emotions and mental defects. Many traders spend most of their time on technicals and fundamentals but self-analysis is one of the most important elements to the game. You can have the best trade setup in the world but without self-awareness you may not be able to execute it effectively. 

Humans tend to be addicted to pleasure and have an aversion to pain. Our consciousness is in a constant balance between pleasure and pain. We have many emotional attachments in life and suffer when they aren’t fulfilled. Trading has a way of magnifying our attachments and pain/pleasure response. The best way to overcome this is to cultivate equanimity. 

Equanimity means having a calm and balanced mind. It allows you to see things on a deeper level and maintain self-control. Being equanimous means that you’re able to observe pain and pleasure without automatically reacting to it. Rather than being a slave to your emotions, you’ll be able to make a conscious choice about how to respond to situations. Sometimes the best action is no action at all.

The most common trap for traders is being overly attached to “being right” with their analysis. Creating a hypothesis about the market is a way to quantify possibilities and probabilities. Some folks think that analysis is about predicting the future and making calls. I see it more as a way to read market behaviour to exploit inefficiencies. If you’re using analysis as a means to bring certainty to the unknown you will be greatly disappointed. Embracing the unknown and realizing that there are no absolutes can reduce your attachments and ease your stress levels. Trading is all about balance and keeping above water during the waves of volatility. 

Sages throughout history have obtained self-awareness by testing themselves with great feats of mental endurance. Meditation can be a great tool for sharpening your mind like a sword. In my next article I will share some simple exercises to increase self-awareness and discipline in trading. 

The markets are a reflection of the collective mental energy of its participants. Master yourself in order to conquer the markets. 


Rocky is a cryptocurrency analyst, strategic consultant, educator, position trader and investor. He started his journey learning about Bitcoin in 2013, became obsessed with it and dropped everything to work full-time in the space since 2015.