A lot of Forex traders fail because of their lack of ability to master their emotions and overcome the psychological challenges of trading. Trading requires a lot of discipline. If you are not disciplined, you will likely find that profitable trading is an impossibility. I am hoping that from this post, you will find some help for overcoming your trading emotions and take a step closer to profitable Forex trading...
What common Psychological Challenges are there when Trading Forex?
No matter what asset class you trade (Forex, Futures, Equities, ETFs or Options), trading can be emotionally and mentally draining for 2 reasons...
Losses are part of trading - in the words of Rocky Balboa, "It ain't about how hard you hit: it's about how hard you can get hit and keep moving forward. It's how much you can take, and keep moving forward. That's how winning is done". This statement from the world's most popular fictional boxer is very true and relates well to trading. You are going to take losses and sometimes you will take a series of losses. Losing cash and experiencing draw-downs is psychologically hard. How many times can you take a 'hit' and continue to trade?
Fear, greed and boredom are directly linked to risking money - Risking money is an emotional business. People hate losing money and most people regret missing opportunities to make money. Forex trading is all about making and losing money and it brings out very strong (and sometimes very raw) emotions. These trading emotions are usually one or more of the following; fear, greed, boredom, frustration.
My Top 5 Tips to Beating Trading Psychology and Mastering your Trading Emotions when Trading Forex
Create a Forex Trading Plan
Too many traders don't have a trading plan, trading strategy or trading system. Instead, they rely on their analysis and judgement. The disadvantage of doing this is that a traders judgement can be heavily influenced by emotion. Too many Forex traders don't open positions when they should or close positions too early due to fear, they let positions run too long or risk too much due to greed, they open trades for the heck of it due to boredom, or they become so frustrated that they open a series of trades with no logical reasoning. Though these decisions may have seemed like a good idea at the time, upon reflection (and usually a loss), these traders realise that they were governed by their emotion(s) rather than making rational and logical trading decisions.
The answer to all of this is to have a set of rules to follow. Having a trading plan or trading strategy helps provide guidance and direction in emotionally difficult times. It is a lot easier and a lot less stressful to follow a set of trading rules rather than rely on emotion/"judgement". For most profitable traders, their success is down to how well they follow their trading strategy rather than how good their gut feeling, analysis or trading knowledge is.
Don't have Unrealistic Expectations and don't Risk too much
Too many traders expect too much financial return from the financial markets. If you haven't doubled your account this month, don't beat yourself up. Even better, don't expect to double your account at all this month. Anywhere from 10-100% return per year is realistic and achievable. If you are expecting to earn more than this - especially within a month - you are likely risking too much. If you find yourself becoming emotional in your Forex trading, it is likely you need to reduce your performance expectation by lowering the amount you are risking per trade.
“I can’t sleep” answered the nervous one.
“Why not?” asked the friend.
“I am carrying so much cotton that I can’t sleep thinking about. It is wearing me out. What can I do?”
“Sell down to the sleeping point”, answered the friend.
- Reminiscences of a Stock Operator
I mostly trade Forex and Futures on the 1 hour time-frame. If there are no trades that suit my trading strategies and analysis, I don't trade. While I wait for the next candle close (60 minutes), I don't trade. What helps me to stick to this is that I have other things to do. This can vary from making Forex trading YouTube videos, writing trading related blog posts, watching stupid videos on-line, listening to Bloomberg, reading, playing video games, working-out, meditating and developing other businesses. All of this helps me to keep busy and keep my mind off any trades I have open and the temptation to open trades out of boredom.
Consider Longer-term Trading by Trading Higher Time-Frames
I mainly trade Forex on the 1 hour chart. I love it and make a great return. Don't be fooled in thinking that the smaller the time-frame the higher the reward. From my experience, it is actually the smaller the time-frame, the stronger the emotion. Consider day and swing trading Forex off higher time-frames. It may be a great help and will likely lessen the emotional aspect of trading.
Trading on higher time-frames also provides a greater lifestyle. Do you really think that I would own this Forex trading website if I was glued to a 5 minute chart all day? Trading the 1 hour time-frame doesn't just help minimise trading emotion, it also lets me pursue other hobbies, interests and commitments.
Learn from a Professional Forex Trader
I am not just suggesting this in hope that more people sign-up for my Advanced Price Action Course or enrol for my Trading Mentor Program. I am suggesting that successful traders have managed to discipline their emotions and you should learn how they do this - it can only help!
Member of the Technical Forex Team
Forex Technical Analyst at Triumph FX