Activities that put money on the line tend to draw on the emotions of people, and makes them do things that can be considered in hindsight to be irrational. These emotions play out in the forex market. Emotions tend to dictate the market sentiment. Where those emotions are well filtered and channeled appropriately into making rational trade decisions, things tend to go well. But where emotions are allowed to run riot and make the trader do things they are not supposed to do, then the outcomes could be really bad.
So what are the emotions that tend to play out in the trading process?
Some of these emotions are good, while others are bad and cause a lot of problems when they come to play. Let us see how each of these emotions play out.
An anxious trader is an error-prone trader. Anxiety can cause the trader to miss some of the important points. Things that look very trivial such as not selecting the right trade type or entering a 5 instead of a 2 in setting lot sizes, can be the difference between a good and bad trade. Anxiety can also be brought on by sleep deprivation. So you should avoid habits that produce anxiety.
Fear is one of the commonest emotions that plays out in forex trading. The fear of losing does two things. Firstly, it paralyzes the trader and forces them to continually reconsider entering the market, even when the parameters clearly show that a potential for profit exists. Secondly, there is the fear of losing, which causes the trader to adjust the stop loss to accommodate more losses, in the hope that the trade would eventually recover. More often than not, the outcomes are those of bigger losses than should even have been sustained, which ends up making the trader even more fearful of future trading outcomes.
One thing that greed does is that it makes traders ignore all known rules of risk management. It also makes traders adopt the gambling mindset: play big, win big. Unfortunately, the gambling mindset ignores the fact that most of the time, those who play big tend to lose big and this usually wipes them out. Greed is what makes traders double down on positions (i.e. increase the lot size on an active trade position).
Confidence is a good emotion. This is what helps a trader take timely decisions: decisions to enter the market at the right time, and exit at the right time, irrespective of the outcome. All traders should aim to get to a point where they are confident of their actions in the market.
Nothing beats the feeling of a profitable trade. You are allowed to feel euphoric about the experience, but this euphoria should not drive you to the point of feeling you are above mistakes. Many traders allow euphoria to get to the point of overconfidence and this pushes them to start ignoring risk management principles.
How to Control Your Emotions When Trading Forex
How can you take control of your emotions to prevent them from making you do things you should not do to your trade positions?
- Set and Forget
Perhaps one of the best ways to control your emotions is simply to set your trades and take yourself away from your computer screen until it is all over. This single action has the potential to take away some of the crazy things traders do when confronted with price candles that are doing things they do not like. Many successful traders trade off the daily charts for one simple reason. A daily candle represents all the price action for one day. It is almost impossible to see what a candle is doing on the daily chart in terms of short term wild movements, so it is not very likely to see a trader doing things like adjusting a stop loss or trying to double down on trade positions. So if you know you tend to react spontaneously to wild price movements on an intraday basis, the best thing to do is to set the position and allow it to play out…without you.
- Risk Management
One reason why people get so emotional with trading is because they do not trade with positions sizes that conform to acceptable risk limits. It has been widely established that no more than 2-3% of account capital should ever be committed to the market in active positions. Furthermore, taking trades where there is a potential to make 3 pips for every 1 pips risked as stop loss (i.e. a risk-reward ratio of 1:3) enables a trader to have a good cushion, as it will take 3 losses to offset a winning trade. When these two elements are combined and used properly, negative emotional responses such as greed and fear will not come up. When you know that you can easily make up for a loss because you have adhered to acceptable risk management, or you know that you can still be profitable if you win 3 out of 10 trades a month, these damaging emotions will not be at work.
- Use a Forex Robot
If all fails, you should deploy a forex robot which is capable of delivering profits and complies with acceptable risk management standards. Forex robots are emotionless. Therefore, you can have the best of two worlds; trading with a profitable software as well as doing so without emotions involved.
- Use a Copy Trade
Copy trading can take trade orders from the trading accounts you follow on a social or copy trading platform and send them to your account without human intervention.
- Read Books on Trading Psychology
There are many books and resources on how to control your emotions during trading. Some of these books on trading psychology include the following:
- The Psychology of Trading by Brett Steenbarger
- Trading Psychology 2.0 by Brett Steenbarger
- The Essence of Psychology in Trading by Yvan Byeajee
- How to Stop Overtrading by L.R Thomas
There are other materials out there, so take steps to control your emotions and prevent them from harming your trades.
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