How can traders manage their emotions?

It all comes down to your psychology, which is rooted in the confidence you’ve got in your system and your rules. If you’re finding that when you’re trying to place trades, you’ve got impulsive reactions like “Oh, this is a good one. I’m going to place a double order and buy twice as many stocks as I should.” Or, “Oh, I don’t like this one. I’m going to reduce my size on this trade because I’m not comfortable with that stock or I lost money on this stock last time. Therefore, I’m going to take a small position and skip this trade.” If you’re having impulsive reactions like that, then that is coming from the lack of confidence in your system. What you’ve got to do is to step back from that particular trade, look at your process and system, and make sure that you’ve back-tested it enough to build confidence, make sure it fits your personality, your objectives, your lifestyle, and then follow it more consistently.

It can feel easier said than done when you’re looking at this one trade and you’re grappling over how to do it, or you made a ton of money on this stock last time and you want to double it. You’re going to go all in this time, but you’ve got to ask yourself every single trade, “what would my system do?” And do that. Because if you’re to win the trading game, you have to stay in the game and to stay in the trading game, to be a profitable trader for years or decades, you have to make sure that you follow a consistent decision-making process and system. Because when you start varying your decision-making process and your position size, and whether or not you take a signal, all of a sudden, you don’t actually know anymore whether your approach is profitable because you can’t possibly test it if you’re varying it all of the time.

You need to have consistency in your decision-making process so you can take those rules, test them and make sure that approach is profitable. That’s how you get consistent and eliminate the emotional responses, you need more testing, build the confidence when you have the reactions, formulate those emotional reactions and crystallize them into a rule that you can test and decide whether that reaction is wanted and that will build your confidence in your system.

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