Keeping Your Emotions Under Control

The Important of Emotion in Forex Trading

Wherever money is, emotions will run high. Our money is the resultant of all our efforts on planet earth to make a living. So when that money is plunged into an investment with the expectation of making more money, then emotions will definitely come into play. Expectation itself is an emotion, and there will be other emotions that come along if expectations are met…or not met.

Due to the unpredictability and high-paced nature of the forex market, a lot of emotional factors come into play as we see what happens on the charts. Some of these emotions are:

–       Joy

–       Confidence

–       Fear

–       Confusion

–       Doubt

–       Panic

–       Greed

–       Anxiety

–       Disappointment

How do these respective emotions come to play in the forex market? Are they good or bad for trade outcomes? Let us see how each one affects the trader in one way or another.

a)    Joy

Some traders feel joy just to be able to be part of the forex market. This is because they have at last been able to open accounts and have a chance to make more money from this venture. It is usually an emotion experienced by new traders. For older hands in the game, joy only comes when money is actually made, withdrawn to the bank account or credit card, and spent. I still recollect the first month when I withdrew $700, $600 and $1000 as my profits from forex trading. Just being able to have extra money to be able to spend outside of my salary was pure bliss. However, joy is an after-effect of trading, and has no real bearing on trading itself. Perhaps the only real effect is has on trading is boosting a trader’s confidence that it is actually possible to earn money from forex. In that sense, it is a good emotion to have, but not in excess.

b)    Confidence

It is good to be confident, but not over confident. Have confidence in your abilities, especially if you know you have taken time to study the market and obtained good strategies in profiting and risk control. Confidence also helps a trader recover from losses, or handle a losing streak well. It is a good emotion to have and a trader will need it in the face of adversity.

c)     Fear

In forex, fear is the direct opposite of confidence. Fear sets in when losses have started to occur. Without confidence to bounce back, fear will only produce more fear, and more losses. Fear can also occur when the trader is unsure of his strategy, is not properly trained, or has made a mistake. Fear is a bad emotion which should not just be controlled, but be stamped out.

d)    Confusion

Confusion occurs when the trader does not understand what is going on in the market. Confusion results from poor training, and a lack of learning on the trader’s part. Confusion can be a good thing for a beginner though, if it leads to a quest for more knowledge or leads to the adoption of a mentor to help clear the confusion. A confused trader should discontinue all trading and rather seek for more knowledge.

e)    Doubt

Doubt is a precursor for fear. Initially, there will be doubts. But if a trader can overcome doubt, then there is a chance that trading results will improve. But persistent and irrational doubt will lead to fear and the all the horrible things that follow it if not controlled.

f)     Panic

Fear and panic are twins in forex. Panic is bad through and through because it will always lead to the wrong decisions. Panic should be stamped out from a trader’s life.

g)    Greed

Greed is just as bad as panic, because it will always directly lead to losses. Greed is what leads traders to assume too much risk. Wherever you see margin calls occurring, investigate properly. You will see trades that were taken out of greed.

How Traders Can Control Their Emotions

The following strategies will help traders keep their emotions under control, or channel some of these emotions in a positive direction:

a)    The first step really is that no trader should start a trading career without the services of a mentor for the first few months of trading. Having a mentor will prevent all manner of silly mistakes from occurring, and will help to clear up confusions where this is happening.

b)    Keep trades as simple as possible. The simplest strategies will always work best when compared with complicated strategies.

c)     Good risk management is a must in forex. Beginners should not risk more than 3% of their accounts in active trades. Excessive risk is one reason why fear seizes traders by the throat when they see what negative movements are doing to their equity.

d)    As controversial as this may sound, it is not a good idea to always stare at the charts after setting a trade. For instance, if a simple trade such as a bounce of the appropriate trend line in a channel is used, it will produce the desired result. This strategy helps traders set the correct stop loss, the correct profit target and so does not need the trader looking at charts and skipping beats with each negative tick. Once you know that price will take off from A and get to B, what it does in between is not a problem. Even drivers who undertake long distance journeys occasionally stop for a nap, or to buy food, or to take a leak. These activities do not stop them from reaching their destination, and so it is with price action in a trade which has been well setup.

e)    Read books on trading psychology such as “The Psychology of Trading” byB. Steenbarger, “Bird Watching in Lion Country” by Professor Forex, and “Trading in the Zone” by Mark Douglas. These books will help you deal with your emotions as a trader.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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