In day trading, the big emotions can take over and mess up your strategy and your returns. The enemies are doubt, fear, and greed; like any bullies, they have their toadies, including anger, anxiety, boredom, and depression.
Doubt: Day traders have to act fast to place their buy and sell orders. There isn’t time to second-guess the decisions. That’s why traders need to stick to their plans, which isn’t always easy.
Backtesting can help build confidence in a plan, and the use of automated trading tools can help overcome the tendency to hesitate before clicking on the mouse button.
Fear: Fear is one of the worst emotional enemies of the day trader. Instead of trying to make money, the fearful trader tries hard not to lose it. He is so afraid of failing that he limits himself, doesn’t take appropriate risk, and questions his trading system so much that he no longer follows it, no matter how well it worked in the past.
One way to limit fear is to have a plan for the trading business. Before you start trading, take some time — maybe half a day — to sit down and think about what you want, what will happen to you if you get it, and what will happen to you if you don’t.
Greed: There’s a saying down at the Chicago Board of Trade: “Pigs get fat, but hogs get slaughtered.” Traders who get greedy start to do stupid things. They stop following their trading plans, hold positions too long, and make rash trades. The greedy trader loses discipline and eventually loses quite a bit of money.
Limit orders, which automatically close out positions when they hit set prices, are one way to force discipline in the face of greed.
Anger: The markets can be maddening. They don’t do what you want them to, and that often costs you real money. Your rage at the markets can cause you to stop seeing straight.
When anger makes it impossible to think clearly, your best bet is to call it a day, close out your positions, and go somewhere far from your trading screen(s). The only way to psych out the market is to be just as mechanical and unemotional as the blips that cross your screen.
Anxiety: Anxiety is the anticipation of things going wrong. Anxious people avoid whatever it is that makes them upset. That means that a trader may not make an obvious trade or hold on to a losing position too long. He becomes too nervous to trade according to his plan, and his performance suffers.
One way to combat anxiety is through automated trading and limit orders. If your limits are set when you place the trade, then your anxiety can’t override your plan.
Boredom: Day trading can be really dull. You may spend most of the day waiting for the right opening. A flurry of trades, and it’s all over. To keep yourself entertained, you may start making bad trades or letting your mind wander away from the task at hand.
If you’re really bored, close out your positions and take a break. Going for a walk or quitting early can clear your head and help you focus when you get back. Remember, one of the benefits of working for yourself is that you don’t have a boss to criticize you for knocking off early.
Depression: Depression is a severe downturn in your mood, especially one that causes you to feel inadequate and lose interest in things you used to like. The ups and downs of the market can make traders particularly vulnerable to depression. At best, depression can make it hard for a trader to face the market. At worst, it can lead to alcoholism, alienation, and even suicide