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Every trader that has been around the markets for some time knows that one of the hardest aspects of trading is the ability to control your negatively charged emotions when things do not go as planned. Here we will present four things that you can do to help keep calm and focused in the market.
Have a Daily Routine
Trading the cryptocurrency markets successfully can be quite demanding, and so to alleviate some of the pressures, it is important that we build some structure around our day. The less time we spend thinking about what to do next, the more time we have to do the very things that we should be doing.
Our brains are wired in such a way that it likes order and consistency. And when we have a consistent routine around our trading activities we can focus better and be more efficient. But without a doubt, many new and aspiring traders have a hard time with creating this type of structured environment for themselves.
So, let’s dig into this a bit with a real example of what a trading routine looks like. Let’s take myself for example. Every day prior to the New York open, I have a set routine that I follow.
First, I will check all my open positions and make necessary adjustments if I have to. Then I will review all relevant news that has come out during the last 24 hours or is scheduled to be released within the next 24 hours. I will not even look at any charts prior to doing this. Then I will go thru my watchlist one by one on both the daily and 240 minute chart and update key levels and make notes of potential trading opportunities.
Once I have complete that, then I will go back and take a closer look at the potential opportunities and see if there is a trade setting up for the day. And if there is, I will typically set an alert or put in a limit order to execute the trade based on my assessment. I almost always use bracket orders, which means that when my entry is triggered, it will also initiate a stop loss and take profit order as well. As such, I don’t really worry about further trade management until the following day. This is the routine that I follow each and every single day, without fail. I do not deviate from this and the process has become second nature to me at this point. By being regimented in the process, it helps me to control urges and remove many of the negative emotions related to trading.
Create a Trading Plan
Many new crypto traders are in such a rush to begin trading, that they often forget one of the foundational components of building a successful business from trading. And that component is a basic trading plan. Who in their right mind would open up a restaurant, shoe store, or even a kiosk in a mall without having a basic business plan? That seems too obvious to even mention.
But when it comes to a trading business, most people often neglect putting together a simple trading plan that will outline their trading activities. No wonder, many traders have no clue what they are doing. How can they, if they don’t have a detailed plan that provides them the roadmap.
So now, hopefully, you understand the importance of having a trading plan. But the next obvious question is what types of things should you include in the trading plan?
Below are some questions and considerations that should be answered and included within your trading plan:
1) What are your primary goals from trading?
2) Which cryptocurrencies will you trade?
3) Which timeframe will you focus on?
4) What trading style will you employ?
5) What will be your daily trading routine?
6) How much will your risk on each trade?
7) At what points will you periodically evaluate your performance?
These are some of the basic elements that should comprise a trading plan. The more detailed your plan, the better prepared you will be and the less you will rely on your emotions to control your responses in the market.
Backtest Your Trading Strategy
If we step back for a moment and ask ourselves why we tend to become so emotional in the markets, it will become clear that the underlying cause is fear and uncertainty. Though we can never be certain of what the market will do, we can take steps to ensure that our responses to an uncertain environment does not overwhelm us. And one the best ways to do that is by gaining a level of confidence in our trading strategy or system.
Ok, so then how would you be able to gain this much needed confidence if you are starting out. If you are a novice trader, then you obviously don’t have enough experience with your strategy to get a reliable level of comfort or confidence from trading it as of yet. But there is a viable solution to this problem.
You would want to backtest your strategy and see how it would have performed in the past. Now keep in mind that past results are not necessarily indicative of future results, but by backtesting your strategy you will have a good understanding of your strategy metrics, such as how it has performed in a particular market environment, the average win percent, the average win to loss ratio, the maximum drawdown, and the sting of winning and losing trades. Knowing these metrics will help you when you are feeling emotionally drained from a losing streak or are experiencing a losing period.
For example, let’s say you have backtested your trading strategy over the last 4 year period, and have found that your trading strategy has experienced a max drawdown of about 35% during this period. Furthermore, you know that during the same testing period, the strategy has had a maximum of 7 consecutive losing trades as well.
This information is crucial and something that you need to know. Why? Because by knowing this, you will not panic or override your strategy after a string of 5 losing trades or after experiencing a 25% drawdown. Or at least you shouldn’t because it falls within the normal range based on your backtest results. So, essentially there are many advantages to backing your strategy both from a money management perspective and a psychological perspective.
Reduce Your Position Size
Another way that you can help to keep your emotions in check is by reducing your overall position size. Generally speaking, most traders tend to trade too big of a size in relation to their overall account. And as a result, they are typically risking too much on any given trade. Naturally then, this will have an effect on your psyche. Essentially you become attached or married to your position because you have too much on the line, and cannot stand the thought of losing on the position.
The way to overcome this psychological burden is by trading at a level that will not affect you. Whether you win or lose on the trade, it shouldn’t make much of a difference. It’s just one trade. But the problem is that many traders are so attracted to the action of trading that the notion of trading small just doesn’t appeal to them.
They have to get their fix in the market, and the only way to do that is if they have a sizable amount at stake on any given trade. This is more of a gambling mentality than a professional trader’s mentality. The professional trader is well aware that in order to succeed in the market, they must control risk and trade small. They know that, first and foremost, they must survive for the long haul in order to let their edge play out in the market.
As a general rule, I would suggest using a fixed fractional position sizing model and allocating no more than 2% of capital on any given trade. This is probably the single best advice that I can offer any trader – novice or experienced. But it is the one rule that I find most traders either deviate from or neglect altogether.
Although it may not be evident at first to many new crypto currency traders, the ability to control your emotions will play a major role in your success or failure in the markets. As such, you should work on this aspect of trading as much as you can. And hopefully you will take some of these suggestions to heart and take the next step of implementing the ideas presented here for your own benefit.
This article is a guest post provided by Vic Patel. He is a full time trader and educator at Forex Training Group, a currency trading blog dedicated to helping traders improve their trading performance.
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