Trading Psychology - How to manage your emotions while trading Forex

Introduction

In this article, we will explore which different emotions Forex Traders feel and the things we can do to effectively manage these feelings and take control of our trading destiny. We will also take a look at what common mistakes traders make due to not thinking clearly and how you can learn to identify these pitfalls and how to avoid them in the future. 
 

Humans are Emotional

Out of all living beings, humans are to be considered the most susceptible to letting emotions get the better of us and cloud our judgment.  

Throughout history, we have seen situations where world leaders of countries have ‘reacted’ to situations rather than respond - resulting in war. Or situations where soccer stars have reacted emotionally in cup finals, getting a red card because of a knee jerk reaction where their emotions have gotten the better of them. We can think of Zinadine Zidane's infamous reaction in the 2006 World Cup final against Italy, which arguably cost France the tournament.

The point is that humans are sensitive souls and prone to reacting with their feelings rather than taking a step back and taking stock situation. This is particularly the case when we factor in money to emotionally driven scenarios.  

In this article, we will explore which different emotions Forex Traders feel and the things we can do to effectively manage these feelings and take control of your trading destiny. We will also take a look at what common mistakes traders make due to not thinking clearly and how you can learn to identify these pitfalls and how to avoid them in the future. 

 

Psychology

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.
 

Identifying emotions: Traders should ask themselves “Am I an emotional person?”

There are 3 key emotions which are paramount when we think about Forex Trading: 

Controlling greed, fear, and hope.

Greed, one of the 7 deadly sins, as it turns out - can be one of the most damaging emotions which have led many traders, experienced and amateur alike, on the path to destruction.

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. 

Greed can make traders overtrade, take unnecessary risks and quickly squander an account balance. It is important to enter the market with a specific strategy, too often traders driven by greed will have no real strategy, try and scalp and in a volatile market, this can be a dangerous game to play. It can be even more damaging if a trader was to win this way as it will lead them into a false sense of security and could make them think that they are doing something correctly when - in fact - it was a fluke.  

Fear can be particularly debilitating for Forex traders. Fear can make a trader less inclined to take any risks - analysis paralysis.

Although there are measures traders can take to counterbalance fear, it is still present in most traders. Within platforms such as MT4, particularly emotional traders should make use of a ‘Stop Loss’ and ‘Take Profit’ 

A good tip would be to set a TP and SL of a realistic target, that pre-trade, you would be happy to take. Before we open a trade we think the most rationally. When we open a trade and start to monitor, we are in our least rational headspace making discipline an important ingredient to success here.

When a trader opens a position, fear can make traders close positions early and often before hitting a target stop loss.

Hope is particularly dangerous in terms of a false sense of security. Traders should only trade with funds they are willing to lose. It is important to only trade with the disposable income we have. Not eating into a marriage fund or mortgage fund for example. Then when we experience losses traders re-enter the market with a ‘’hope’’ to recoup those monies. This is not only damaging for our trading careers but in real life too.

 

Emotions within the ‘average trader’

Are you prone to emotional swings? If the price goes up are you feeling a sense of elation? If the price goes down do you feel as though the world is collapsing in on itself?  

Are you a bag of nerves when involved in a trade, can you sleep at night? Average traders do not have confidence in their plan or system increasing nervous energy - More often than not because they do not have one or have not stuck to a plan.

Average traders quickly give back to the market, recent gains - getting stuck in a vicious cycle of:  

Deposit, trade, take a small profit, ‘give back’ profit, repeat

For example, you make $250 on a winning trade, then you get into a false sense of security, get cocky and then ‘give back’ funds in the next trade - This can be construed as average.

Traders should take time to educate themselves with online materials to make more informed decisions before opening a position - making use of a blend of analysis and trading platform indicators.

 

Useful tips to reducing emotions whilst trading

• Use a blend of analysis 

• Stick to a strategy

• NEVER USE MONEY THAT YOU NEED - this will only amplify emotions

• Use the money that you can afford to lose - disposable income

• Remove candlestick color - we can associate green and red candlesticks with winning and losing - sending us on an emotional rollercoaster 

 

Conclusion

To summarise, it is important as a trader, to be honest with ourselves. Identify how emotionally balanced we are so we can be as honest as we can with ourselves. Once we are honest with ourselves, we can start to look at measures to put in place to prevent our emotional side having a detrimental impact on our trading campaign.

We should put in the relevant measures to help us in terms of trading such as SL/TP. We should use a blend of analysis to help us make informed decisions on our next entry position.  

We should not be consumed by watching charts once we have entered a trade. If you have set your TP and SL effectively, this should be enough for us not to get wrapped up in emotions.  

Do not be afraid of your emotions, instead, learn to harness them and use in your favor to yield better results in the future. 

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