The hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, how you deal with those emotions will determine your success more than any one thing.
To manage your emotions first of all you must trade a system and method you truly believe will be a winner in the long term.
You must understand that every trade is not a winner and not blame yourself for equity draw downs if you are trading with discipline.
Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and risk of ruin odds.
With that in place here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:
Despair = Losing Money – Trading Better
Do not despair look at your losses as part of doing business and as paying tuition fees to the markets.
Disappointment = Expectations – Reality
Enter trading with realistic expectations. You can realistically expect 20%-35% annual returns on capital with great trading. More than that is possible but unlikely.
Regret = Disappointment in a loss+ Caused by lack of Discipline
If you followed your trading plan and lose money because the market did not move in your direction so be it, but if you went off your plan and traded based on your feelings and opinions then you should feel regret and stop being undisciplined.
Enjoying your Trading = Winning Trades – Fear of Ruin
Trading is much more enjoyable when you are risking 1% of your capital in the hopes of making 3% on your capital with a zero chance of ruin. It is not enjoyable when you are putting a huge percentage of your capital on the line in each trade and are only a few bad trades away from your account going to zero.
Wisdom = Square Root of Experience through years of successful trading
To get good at trading you have to trade real money. Wisdom comes from putting real money on the line for years and proving to yourself that you can come out a winner in the long term.
Faith in your system = Belief through back testing + Experience of winning with it for years
While you have to hold the opinion of whether each trade is a winner or loser it is different for your trading method. A lot of emotional trading can be overcome when you do not have doubts about your method. When you hold an almost religious fervor over believing in your method, system, risk management, and your own discipline you will overcome many of the emotional problems that arise with other traders in the heat of action.