Having expertise in market analysis or having extensive knowledge about Forex is not the only factor that determines the success of a Forex trader. You may know thousands of successful strategies and you may be good at using all the indicators out there, but if you don’t learn something that is very important then you will have a hard time making money in Forex. It is often overlooked or completely ignored, but it is something that every Forex trader should become good at. It is the skill of managing your own emotions and is a part of Forex trading psychology.
Victor Sperandeo, a founding partner of EAM Partners, L.P and popularly known as ‘Trader Vic’ says
“The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.”
What he says is absolutely true and is an essential concept in Forex trading psychology. There are many people who are extremely intelligent, but still lose in Forex. Because the emotions like greed, fear and an intense euphoria after a profit trade cloud their decision-making ability.
When you don’t know how to handle emotions, it can ruin your trading day and cause damage to your trading account to the extent of losing a huge amount of money. The reason is simple; We take hasty and irrational decisions when we are angry, depressed or greedy.
How do Experienced traders handle emotions?
The Forex trading psychology of Experienced traders are quite good and they do handle their emotions well. They exactly knows when to trade the market and when it’s better not to trade. The below are the ways how they handle their emotions.
1) They don’t trade out of greed
Thus they avoids many things that will cause a stressful emotional response. And if they are really in fear or not in the mood to trade, they simply avoid placing trades. It is better than placing a trade and losing money, right?
2) They are aware of the uncertainty in Forex
Experienced traders are aware of the uncertainty in the Forex market which is not the same as lack of confidence. It is just a fact in Forex, No matter how good your trading decision is, the market can unexpectedly go against your predictions at any time. If you clearly understand this while placing a trade, you won’t get a shock when the trade results in a loss. All you need to do is to be fully prepared to face the loss. There is a saying: Hope for the best but prepare for the worst. You have to be mentally prepared to accept the loss you face. This will certainly reduce the impact of negative emotions. The Awareness of uncertainty is another crucial thing to understand when it comes to Forex trading psychology.
3) They never expect quick profit
This is also related to greed. What do novice Forex traders do when they want to make some quick money? They just place trades with huge trading volume and lot sizes. But when you choose a huge lot size, you are also risking a huge amount of money. While Forex traders who do this only consider one possibility and blinded by thinking how much they can earn if the trade goes well, they completely forget or ignore another possibility: If the trade doesn’t go as expected, they will lose a huge amount of money. Also, in a few more trades they end up losing their entire capital. Experienced traders never do this! They always follow a good risk management.
To sum up, understanding three important things about Forex trading psychology can make a big difference: Taking breaks when you are too emotional, always being aware of the uncertainty in the Forex market and practicing wise risk management.
Prevention is better than cure
Here is another thing to keep in mind. Avoid all possible ways that emotions can ruin your performance. We are going to list some tips which are going to help.
- Have a very good trading plan. Trading with good planning reduces risk and also prevents any emotions to affect your performance. You need to develop your own personalized trading plan and develop a solid trading discipline.
- Once you place a trade, don’t keep looking at the currency movement. Just place the trade and walk away. If you have the habit of watching the trade, you will give in to many temptations. You may move your stop loss hoping that the market is going to reverse. You may move your take profit level hoping that the trend is going to continue in the same direction. If you keep moving these values, there is no point in setting them in the first place. It also feeds your emotions.
- Always use well-proven strategies. When you use a strategy that has been tested enough in the past, you will be able to avoid losses more easily.
- Once you have got three consecutive profit trades or losing trades, it is better to take a break. If you get three consecutive profit trades, your fourth trade may be entirely motivated by overconfidence. If you get three consecutive losses, your fourth trade will be driven by an extreme need to earn back the money you have lost.
Managing your emotions is the key to long-term success
If you didn’t know how your emotions can spoil your trading life, then you have learned a very valuable lesson from this post. If you have ever wondered why 90% of Forex traders lose money and quit trading forever, then you have the answer now. Not being able to handle emotions and not understanding Forex trading psychology is the strong reasons for this to happen. Every other reason you can think of springs for this one reason.
For example, one thing that makes a lot of traders to quit trading is poor risk management; they risk more than they should. But why do they practice poor risk management in the first place? The definite one-word answer to this question is ‘greed’, which is an emotion. Why would anybody jump in and start live trading without gaining sufficient experience in trading in a demo account? The same reason! They want to make quick money. If you have learned the art of managing your emotions, you can certainly call yourself as an experienced and professional trader.
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