The “English Dictionary” defines emotion as, “A person’s internal state of being and involuntary physiological response to an object or a situation; based on or tied to physical state and sensory data.” In the Kingdom Animalia, man by dint of nature is the only specie furnished with a “working” brain. This means he can reason critically and logically, and a direct result of that makes him extremely emotional. Forex trading emotions are a bane and that is why trading psychology is crucial.
Traders are one sect of people who are seriously tormented by the swings of emotions. It hardly matters how strong you think you are emotionally; when your money is involved, expect to fold up a bit when all else is going south. That said, emotions are not wholly bad since the pathos of happiness, motivation and arousal are all positive ones. Uncertainty, fear and worry are the negative ones, and those have managed to plague traders since Adam.
Scenario that can mess up trading psychology.
A very potent signal ended you up in a loss; you see the next signal and your mind tells you not to take it because of what happened previously. A while later you check your chart and price is going the direction you predicted but you missed out!
The fear of missing out (FOMO) on the next opportunity gets you in a very bad trade that depletes your account. Price takes out your stop-loss but a while later it heads the direction you predicted. These are some of the few instances that generate and escalate negative trading psychology in you.
Building up the solution to negative forex trading psychology.
Question is, can you trade without emotions? Answer is a simple No! As a matter of fact, the only time you can do away with emotions is the time you are referred to as a corpse. But there is good news; and that is, you can actually manage these forex trading emotions to improve your trading psychology once you practice what I preach below.
Thus, freedom from emotion is not a guarantee but as for freedom of emotions I can assure you of that. From my experience, the pain from a loss used to be deeper than the joy from a profit. Nonetheless, it is a thing of the past now, many traders have been able to overcome their emotions too. What is it that they did to transition from that state to build such a solid psychology?
The reason why worry takes over your whole being when you enter a position is that; you want it to end in profit no matter what. That is the way of the perfect trader (he does not exist). Forex trading, as well as all forms of trading results in profit or loss and you need to let that sink in. The market is inhumane, it does not know you and it does not care the least bit about you.
Keep this in mind.
All trading is a zero-sum game (another loses for another to win and vice versa). You can’t always end up in profit, i.e., Forex trading losses are way normal. Start viewing losses as the cost of doing business or even taxes.
To the one who still thinks trading should be 100% profits, I recommend just 3 books for you; “Trading in the Zone” by Mark Douglas, “Fooled by Randomness” and “The Black Swan” both by Nassim Nicholas Taleb. After you complete these books by the industry professionals, I can say no more.
FUD (Fear, uncertainty & doubt) takes over you once you enter a position? That is what 90 or so percent of traders do and that percentage consists of the losers. Uncertainty births fear and it is of no wonder; because you do not have a strategy in place, fear grips you once you buy or sell.
Even if you have a strategy, you have not tried and tested it before trading live, or you are just a strategy-hopper; you change strategies frequently before you can determine its potency. If you’re guilty of this, your forex trading psychology will be a mess.
These are some of the contributing factors of fear. With a potent strategy like Price Action, you will be free from fear. Some of the other things that put fear in you are, trading without a stop-loss and getting greedy by trading lot sizes that do not suit your trading account capital.
The solution to forex trading emotions.
Warren Buffet has this to say about emotions; “The most important quality for an investor is temperament, not intellect”. There is every bit of truth in that quote. Now, here are tips that you can use to develop emotional intelligence as a trader. Follow the simple tips below to improve your trading psychology.
The goal is to be a tactical mindful trader, so you leave the impulse trading behind for good. Trading tactfully requires courage, discipline and impartiality but there’s no way you are going to achieve those without a strategy.
A strategy is built around a trading system, risk management and psychology. These 3 are equally important, falter in one and set yourself up for failure.
Basically the platform which is used to execute trades is the trading system. You need to first familiarise yourself with the one available with your broker. There are countless ones out there but I prefer the Meta trader.
Risk management refers to how much you win when you are right and how much you lose when you are wrong. Risk-Reward ratio 2:1 and above is just fine. With a 2:1 R/R ratio, if you risk $50 on a trade you stand a chance of profiting $100.
The ratio can always be increased to 3:1, 4:1 and as high as suits you with time (but always stay realistic). The psychology is fundamentally the forex trading emotions I’ve been talking about.
By following these clues religiously, all it will take to succeed is to stay disciplined and stick to the rules; this helps in developing courage, because you really know what you’re up to. Stay impartial with your trades in the sense that; you are neither bullish nor bearish until you see something critical on your chart.
I had a rough journey before managing my emotions to improve my forex trading psychology. I’d want to know if you’re still struggling with emotions or you’ve evolved through it over some period.Bring me up to speed in the comment section.