Forex Trading and Emotions don't mix!
In sporting terms, it easy for us to make betting decisions based on our feelings. It is not uncommon for punters to leave out their favorite football team on an accumulator at the weekend. Why is this?
Because it is not so wise to stake cash on your team as our heart can lead over our head and we make bets based on what we want to happen as opposed to what we think might happen.
We can assimilate this in trading terms in that we should not enter a market when we do not have our emotions in check.
This article will explore emotions in Forex trading and how trading and emotions are not a healthy mix - especially whilst trading Forex. So, what can we do to help identify when we are emotional and how can we harness these emotions and keep them under control as to not deplete a trading account balance?
It is a fact that humans are emotional beings and prone to acting out of character when under some sort of emotional strain.
Trading Psychology is considered to impact and affect up to 95% of overall trading success. When we think about trading in terms of psychology, this is knowing when to enter a position and when to not enter a volatile market and leave the market alone.
A trader is their own worst enemy when it comes to Forex and it is their responsibility to come to terms with that. The trader is, after all, the chief decision-maker so it's up to the trader to introduce adequate measures to protect open positions.
As a trader, you need to be honest with yourself and accept that you are who you are. None of us are free from imperfections. Humans are emotional beings. As a trader, you will encounter several different emotions throughout your trading experiences. Learning how to control these emotions is imperative.
So, what exact emotions do we go through whilst trading?
One of the 7 deadly sins, greed, pops up time and time again in Forex trading. Arguably this is the most damaging emotion when trying to become profitable as a trader. Being greedy can help us wipe out an account balance in a single sitting - this goes for new traders as well as more experienced ones.
Greed makes humans act irrationally, particularly when there is a monetary aspect involved and even more so when there is high leveraged trading on offer. We often see Forex brokers offering leverage of around 1:500 for Forex pairs, meaning traders can put up smaller amounts of capital and still seek large gains.
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Greed can impact traders in a variety of ways such as making traders overtrade and take unnecessary risks in the market.
This is why it is important to enter the market with a trading strategy and stick to that strategy - maintain discipline at all costs!
If you enter a position with a particular target profit in mind, then take it. Additionally, traders should set themselves a maximum loss as damage control. Losing money is inevitable in trading. Don't beat yourself up too much as loss something bound to happen.
Within the MetaTrader 4 platform, users can put in a ‘stop-loss’ and ‘take profit’ function. The stop loss feature will take you out of a trade at a monetary value that you set to get out of the trade when you have lost as much as you are willing to lose.
The take profit feature will as it says, take a predetermined profit that you have entered. If you are away from your computer, this is a great way to remove temptation and greed - falsely thinking you can squeeze a little more profit from an open position.
The market can easily move the other way and a profitable position could turn into a loss within minutes if greed decides to crash the party.
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Fear can be as dangerous as it is scary. Traders can find themselves like rabbits in the headlights in when in certain positions. A particularly debilitating feature of fear is analysis paralysis. We might over analyze some data so much that in the end, we do not know how to quantify it end up making no real decisions at all.
When a trader opens a position, fear can make traders close positions early and often before hitting a target stop loss. Should a trader open a position which starts into profit, fear can have an adverse effect in that the trade will be closed early due to fear of the price falling back down.
Fear may lead you to feel to close early as fear makes you lose trust in your original plan or ideal profit range. Again, this is why when trading it is important to have a plan and stick to it, being disciplined!
People who are new to trading can often succumb to FOMO - Fear Of Missing Out. This can happen when you see a particular asset performing well and you begin to think you will miss your chance, your opening!
So, traders will open a position and what happens?
The market inevitably takes a downturn and you are involved in a trade which is dive-bombing. Inexperienced traders often jump into trades at the wrong time and it can be costly. This is why it is of key importance to have a plan and stick to it, maintain discipline, conduct research and again, stick to a plan!
What can we do to keep a lid on emotions?
There are several things we can do to keep ourselves in check and help is be more mentally prepared to enter markets.
- Pace yourself. Just because you are doing well one month doesn't mean that you should get overzealous and double your lot sizes in the following month. It is important to stay grounded and take care of that account balance.
- Relax after a trade. Separate yourself from your PC after trading. This will help remove yourself from a trading headspace and help you revitalize.
- Take a walk. Again, remove yourself from your trading environment and get some much needed fresh air.
- NEVER USE MONEY THAT YOU NEED. This will only amplify feelings.
- Only use money that you can afford to lose - for obvious reasons.
- Remove candlestick color. We can associate green and red candlesticks with winning and losing - sending us on an emotional rollercoaster.
- Set yourself target profit and identify an amount that you would be willing to lose pre-trade.
So, what have we learned?
The key takeaway here is, to be honest with ourselves. We are all only human and being emotional is perfectly okay. Harnessing these emotions and keeping them under control is key.
Do not jump blindly into markets when you see one slight indication that a price will move up and you think you can capitalize - take a step back, research, plan and practice.
Making use of functions within MT4 with stop losses and take profit will be a sure-fire way for you to maintain discipline and stick to a plan or realize a goal.
Do not be afraid of your emotions, instead, learn to harness them so you can use them to your advantage on your way to trading success!
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