Trading psychology is so important, yet it’s one of the least talked about aspects of forex trading. We feel it is one of the most important thing to master in any financial trading. You can master technical and fundamental analysis, but if you can’t control the motor that is your brain, and your emotions when trading in the markets (also known as Trading Psychology), you will never become a profitable trader.
Now, this article will not teach you how to become a master of your trading psychology or emotions, but it will give you valuable insight and provide a rough outline to help you get there. For many things in life, there is no better teacher than experience.
Forex Trading and Your Emotions
- Be confident in your analysis! If you put in the required hours of practice on the price charts and you feel that your trading analysis is solid, there should no reason for you to be second guessing yourself.
- Deploy risk management! This should be a no-brainer by now, but it really isn’t. We see it time and time again, people with $2,000 trading accounts have a $1,500 floating profits. This is great and all, but 99% of the time the reason why they’re up $1,500 is because they threw risk management out the window and opened a trade with a huge lot size. Trade capital that you’re prepared to lose, and risk no more than 2–5% per trade. Even if you lose five trades in a row, your account will only be down 8–20%. One bad trade with terrible risk management can whip out an entire trading account. Risk management and controlling your emotions go hand and hand. If you imply risk management, you won’t worry about facing drawdowns or going on a big losing streak (which happens to the best of us).
- Back away from the charts! Once the analysis is complete and the trade is executed, do yourself a favor and go out for a walk. Take a break from the charts. I remember when I first started trading, I had to monitor every candle close after I had placed my trade. It was complete torture, and honestly I believe it made me lose more than gained. So stop watching the 5 minute charts and go do something other than trading. Reset your mind, before you attempt to enter another trade.
- Understand that your goals, are YOUR goals! You’re not competing with anyone. Many beginner traders get attracted at the idea of becoming a rich millionaire in a few months time because they saw the illusion of the possibility on Instagram. Set realistic goals, and understand that forex trading is a journey that is done solo. Just because your friend gained 11% last week, does not mean you need to one up them or match that this week. The traders that are bringing in crazy returns are very high-risk traders, and what you don’t see are the huge losses they neglect to show. Play the long game, and stick to your own goals.
- When the going gets tough, get tough and be smart! If you go on a losing streak, don’t get down on yourself about it. Losing is part of the game, and losing streaks happen to the best traders in the world. As long as you have more winners outweigh the losers in the long run, there’s no problem. When I have a losing streak (usually trading NFP news), I take some time to really analyze what the cause is. Am I trading implicitly? Am I trading with a preset bias? Am I trading during a week of low volume? When losses occur, the best practice is to learn why, so you can reduce making the same mistake again. Do not revenge trade, and never get emotionally attached to a trade. Be smart!
These are just a few rules you should follow when trading forex to keep your mind clear and sharp at all times. There are many other rules to follow, but they are usually a variation of the 5 we stated in this articles. Keep calm, and collect those pips!
Happy trading everyone!