Managing emotions in forex trading
Forex trading can cause emotions to run high. With currency prices on the move 24 hours a day, keeping stress, fear, greed and more in check is essential to trading successfully.
Let's take a look at some negative emotions that may arise over your forex journey – and how to manage them.
The forex markets can be stressful at times. Currencies are often volatile, and major market-moving events can come thick and fast.
If you're experiencing stress, then the first thing to do is try to discover the root cause. It might be that you're allocating too much capital to each position or that you don't have a proper handle on your risk management.
The best way to avoid stress, though, is to plan in advance as much as possible. If you have a strategy in place for multiple conditions, then you'll have something to turn to when the markets run hot.
We'll cover creating a forex trading plan in more detail later in this course.
Currencies move a lot, but chances are you'll still spend a lot of time waiting for opportunities to arise – or waiting for the right time to close a position. At these times, impatience can creep in, causing you to leap into or out of trades too early.
You can't force trades that don't match your requirements or meet the specific criteria you've set as a condition to buy and sell. Impatience will cause you to compromise the work you've done.
One way to remedy impatience is to automate your trading with orders. Set up a strategy with orders, and you don't necessarily have to watch the markets constantly.
Fear of missing out (FOMO) can occur if you spot an opportunity but miss the timing – you might be too late for an ideal entry, or you might have met your personal risk allowance for the day.
Alternatively, it can arise when lots of other traders are jumping into a developing trend. Do you try and ride the wave as it forms, or hold off and do some more research?
Again, the trick here is to set out a plan and stick to it. The best traders stand out because of their discipline. You might have to sit out of some profitable opportunities, but if that means missing some major losses too, then it all works out.
4. Fear and greed
We've seen how fear and greed can drive forex prices on a macro level. It pays to be aware of the effect they'll have on your positions too.
One common mistake among new traders is to let losing positions run out of fear of realising the loss – while closing winning trades too early so they can seize the profit.
The negative effect that this can have on your bottom line is clear. For many, stop losses and take profit orders are the answer. As well as closing losing positions automatically so you can't let them run, they act as a reminder of your profit target, dissuading you from closing early.
If you hit a rich vein of winning trades, as your strategy works favourably during the current market conditions, overconfidence can rear its head. This can have many negative side effects, but the main one to be aware of is overtrading.
There is a reason why many experienced traders describe trading as repetitive: they don't abandon their rules. They approach the market with an unemotional mechanical method session after session, day after day. They treat winning and losing days the same while concentrating on their long-term goals.
Trade within your means and your ability level, develop the utmost trust in yourself and your system before contemplating raising the stakes.