Emotions are one of the largest factors a trader will struggle with when investing. Most traders never really learn how to deal with them. There are numerous books written on emotions. From my experience many made sense, but I never found a book that gave practical and applicable solutions. We are going to share a few concepts with you that will allow you to understand your emotions and solutions to making them work for you, instead of against you.

What Are Emotions?
To work with emotions, lets bring the term to a simple definition. Emotions are the body’s way of reacting to a specific situation, as identifying what it believes to be or become of the experience. Ok, not a scientific explanation, but one that allows us to place understanding and application to controlling them.

Have you ever been extremely emotional about a situation that has yet to occur? During this stage, do you tend to make irrational decisions? When emotions overwhelm a person, it tends to be the direct result of the lack of knowledge or understanding of a situation, which often times causes the mind to fear the worst possible case. 

For example: 
If you were asked to walk on top of hot burning coals, you would more than likely be scared to do so, even if you were told the coals would not burn your feet. The fear would be of being burned. This belief is actually an assumption, which was made based upon the references within your mind. This assumption comes from the belief that skin burns when it touches hot surfaces, which burning coals are. 

In this example, the mind assumes the worst-case scenario, being burned, which brings the fear emotion to the body. Even before the body has yet to touch the coals, the body starts to react as if the scenario was about ready to occur.

If I then told you that you were not going to burn your feet and that 1 million people have done it before you without being burned, your fear would shrink, because the unknown factor is starting to disappear. Fear still remains present though, because this fact has yet to be proven to you. If you were to visually see 1 million people do it, your fear would practically vanish, as certainty builds and your initial assumptions were replaced with your new proven beliefs, i.e. hot coals will not burn your feet. Now that you become certain that you will not be burnt, the fear is no longer present. 

Initially the mind shifted towards the worst case scenario that could happen and once new paradigms were built, the mind was able to release the flood of fears it first experienced and replace them with the certainty or new beliefs that were formed when you visually watched 1 million people walk on coals without being burned.

How does this help a trader?
If you look at the above example, you will see that the fear and anxiety dissipated with the more certainty that was built and the old beliefs were replaced. First you were told that walking on hot coals would not burn you, and then you were told that a large number of participants already did it without burning their feet. Each fact started to shift your beliefs slowly. Finally, you were able to visually prove it to yourself, which practically placed the lid on the fear. The fear disappeared because the void of the unknown and worse case scenario occurring have been replaced with certainty of the end result (that walking on hot coals would not burn you).

How does this apply to trading?
Its application to trading is simple. Most traders make bad trading decisions because they become emotional. Therefore if we can eliminate the emotion, we can achieve greater results. Often times after a trader becomes emotional and loses money, they then become frustrated as their emotions take over and they make decisions based upon fear and not practicality.

The emotion a trader experiences generally occurs due to uncertainty within their approach. Have you ever placed a trade without knowing where your exit or risk in the trade is? Have you ever placed a trade and not known where you were going to sell? Have you ever placed a trade and watched it lose money immediately, but not know what to do? If you have, then these are the times you most likely became emotional.

To eliminate this emotion, all a trader has to do is build certainty. How is this done? Certainty comes from understanding the tools you are utilizing, while knowing the odds of their success and downside risk at the same time. Place these factors together and you have what we call a trading system.

Trading System Equals Less Emotion
If a trader creates a trading system that controls the risk within a trade and he/she understands its application, then the trader can take their emotions out of the market. If they lack a system they understand or believe in, then the risk of failure is going to be high, because emotions will be out of control. This is why we emphasize that it is essential to place together a sound system of trade, prior to placing capital into the market.