One of the more upsetting things about Forex trading is that emotions can get the better of us and turn potential profits into losses. The situation among traders is a bit ironic. Despite the fact that a typical trader is more likely to be right about how a currency will move, they are also more likely to lose money in the long run. They may win more often than they lose, but their accumulated winnings are lower than their accumulated losses.
Various studies have been conducted about this phenomenon, and the results suggest that the culprit is emotion. Traders use their brains to come up with ways to predict how a currency will move. Then, once they’re in, they allow their hearts to tell them whether to stay in or get out of a trade.
The Deadly Emotions
So what emotions should we guard ourselves against? Here are the three most common emotions that could ruin your trades.
1. Greed. Despite what you may have heard in , greed is not good. Greed doesn’t work, not in the long run, anyway.
First, you have to make sure that you know the difference between greed and the desire for profit. Your Forex trading strategy allows you to get those profits. You may have a level of profit marked when you need to get off the trade.
But when greed sets in, the profits you earmarked for yourself is suddenly not enough. You want more, and you disregard that limit you set up. Why follow a limit, you may ask, when there is more money to be had?
Then, of course, the tide turns (as you correctly predicted when you set your limit) and your profits are wiped out. Then you have less profit or you may even have lost money in the deal.
2. Pride. To err is human. You’ve heard of this, right? Making mistakes is a part of life. And that’s why you also place limits on what you can lose on a deal. This stop loss automatically gets you out when the currency reaches a certain level. It’s an admission that you lost money on the deal because you made the wrong call, and you then set your sights on the next deal.
Except that if your pride rears its ugly head, you can’t accept the fact that you made a mistake. You suddenly ignore the loss limit you set and continue hoping that things will turn around to prove that you were right. You may even double down, out of pride. But all you are doing is setting yourself up of a potentially catastrophic mistake.
The stop loss is there to prevent you from losing too much on any trade. It’s an admission that you can be wrong sometimes. By ignoring the limit that you yourself set when your mind was clear, you have let your pride lead you to ruin.
3. Fear. This is one of the most pernicious of all emotions. Your fear is guiding you whenever you get out of a trade far earlier than you should have, simply because you want to make sure that you earn a profit on a deal. But, in the long run, you will limit your profit. Fear is what causes your profits to be lower than what they ought to be.
So how do you avoid these deadly sins? If you notice, these sins are all emotions. They are what you feel when you lose your cool. So when it comes to Forex trading, you need to stay calm.
One way of staying calm is to practice relaxation techniques. Do some breathing exercises, or practice yoga. Get a massage every now and then. Limit your work hours to acceptable schedules, and make sure you have a day off every week. Once a year, go on a vacation. All these things will help you relax, and they can help you deal more effectively with the stress you feel.
You also have to trust your analysis. You’re human, not a robot. Emotions are part of us, no matter what. But that doesn’t mean you let your emotions do your thinking for you. This is perhaps the most common mistake that plague traders to this day.
You have to remember that when you formulated your analysis regarding how a currency will move, you were composed, calm and cool. Now when you feel like making changes in the trend, make sure you first consult the analysis you formulated at the beginning. If it is not “mandated” by the analysis, you have to disregard your feelings about a particular trade or trend. Simply put, you have to learn to say no to your emotions.