When you engage in forex trading, you often go through this emotional rollercoaster. Trading in the volatile currency market can be truly rewarding for those with skills and expertise, but the market risk will always be there for everyone. This becomes a reason for fear, anxiety and stress many traders face during the actual trading process. But we must remember the high-profit potential offered by the forex market, which puts us in a different emotional state, where we become excited, impulsive and greedy.
In short, forex traders can only get in big trouble if they control these emotions while making trading decisions. An effective way to overcome emotions while trading is to practise in a demo account for as long as possible. This will familiarise you with the trading terminal, price movements and other aspects, so when you switch to live trading, you won’t feel as anxious as you could have been if you’d straight jump into live trading. But, there is more to emotional trading than just practising in a demo account, which we will cover in this article, so read till the end, and you’ll know everything about overcoming emotional trading.
Why Psychology Matters In Forex Trading?
Before discussing the relevance of psychology in forex trading, you need to understand the concept of trading psychology. Trading psychology can be described as a trader’s mindset and emotional state, which influences their trading decisions and the result of trades. The trading psychology of a trader will be formed by many aspects, including their personality, standard of living, financial status, knowledge about trading and skill set.
An experienced trader who is well-versed in the currency market will likely have better trading psychology than a complete beginner. Now, the answer is pretty simple if you ask why psychology matters in forex trading. Forex trading is an individual activity for most of us as we trade from the comfort of our homes or use a smartphone for on-the-go trading. Basically, trading is a profession where you get full freedom, and there is no one to monitor you or help you out when you are in a dilemma.
You will have to think for yourself and make decisions on your own. So, you are bound to get emotional at one point or another. The risk of emotional trading is there for all, whether novices or experienced traders. However, those who lack an understanding of trading psychology have a higher risk of getting into emotional trading. The traders may fail to recognise the impact of emotions on their trading process, which will eventually shape into bad trading habits and addictive behaviours. This is why experts stress the importance of psychology and emotional control in trading.
What Happens When Trade Emotionally?
Just like we mentioned earlier, those who engage in manual trading will always find themselves battling with many emotions, which is very normal. But if you let these emotions overpower your rational mind, you will see yourself making stupid decisions which can make you drawn in losses. In fact, emotional trading is a prominent reason behind the failure of many traders because getting success in the fast-moving forex market is far from possible for someone making illogical decisions at a moment of impulse.
Emotional traders are disconnected from reality as their thinking revolves around intuition and mindless speculation. They expect their gut feelings to generate positive outcomes and dismiss the importance of processes like market analysis, trade planning and risk management. A trader who places trades without enough planning and analysis relies on their luck, which is a gambler’s mindset. Such an approach will never favour you in the forex market, resulting in unwanted losses and despair.
Emotional trading is like self-sabotage for a trader as they forget to apply their knowledge and skills in the trading process. Hence, they will never make progress in the long run. Traders who engage in emotional trading are prone to risk a lot more than what they can afford to lose, which also threatens their financial well-being.
Tips To Keep Your Emotions In Check While Trading
- Practise mindfulness – As stated above, emotional trading happens when you lose control over your feelings and take action based on them. You are more likely to make wrong decisions when your mind is disturbed, and hence, you need to take care of your mental health and indulge in various self-care practices like mindfulness and meditation before sitting with your system or device to trade.
Mindfulness is an effective practice to clear our minds as we will solely focus on the present moment without thinking about the past and worrying about the future. Mindfulness is about going with the flow and focusing on where and what you are doing. Many traders have trouble focusing on the here and now, making them prone to making wrong decisions under the influence of emotions.
Being quick benefits a trader, but there are better traits than being impulsive and making decisions without evaluating the pros and cons. You have to trade with a calm mind like a professional would do, and for this, you can follow this simple trick of counting to 10 before making a key trading decision.
You can also increase the count to 20 or 30. The point here is not about counting but diverting your mind for a while so that you don’t feel stressed, anxious or over-excited while placing a trade. Counting can calm us down, allowing us to decide with a clearer mind.
- Stay true to your plan- The primary sign of emotional trading is a trader deviating from their trading plan and entering trades that do not connect with their strategy. So, the first and foremost tip to avoid emotional trading is to stick to your original trading plan. You need to establish rules you can follow to execute your strategy easily. Then, you can monitor your trading activities to see if you are breaking these rules.
A little improvisation is fine if you adapt to the market scenario changes. Still, if you enter random trades just because a trade setup looks good, that would be a red flag as you are overpowered by the positive emotions you are feeling now. Many traders deviated from their trading plan because they didn’t devise a solid plan in the first place.
You need to ensure your trading plan or strategy has no loopholes. A well-defined trading plan gives you fewer chances to deviate, and this will stop you.
- Reconsider your decisions – If you have a habit of deciding without considering different possible outcomes, that will make you prone to emotional trading. The very same decision can produce distinctive results in real life, so we are asked to consider the best and worst possible scenario for each trade we enter.
Reconsidering your decisions gives you a second chance to correct a wrong decision before you act on it. It is just like checking your answers once again in an important exam. Check all the details and trade-related metrics again, and pay the most attention to the calculations to avoid errors. For that you can use trading calculators as well, which easily carry out most of the calculations you need before placing a trade.
- Keep a trading journal – Keeping a trading journal would be ideal to keep your emotions in check and detect any deviation from your plan, as one may fail to identify this during the trading process. However, you are more likely to notice your mistakes later on while reviewing the journal.
There are 2 ways to record and maintain a trading journal. The first one is the traditional diary writing habit, which may be impractical for modern traders who don’t have time to write things manually. Hence, popular platforms and trading software like MT5 have added journal features to make this easier for users.
Even the MT4 platform, the first version of MetaTrader, allows users to journal their trades without effort, as the trading history is automatically imported and synchronised to your journal. The platform you choose for trading will offer many features that you can rely on for developing trading discipline, which is essential for avoiding emotional trading.
So, these were some of the basics of trading psychology that you should know as a forex trader. The tips we mentioned above are tried and tested methods, as they have helped many traders to get rid of emotional trading. You can also follow these tips for focusing on the technical and fundamental side of forex without being carried away by your emotions. Another bonus tip that I can give for avoiding emotional trading is demo trading with a serious mindset. The demo account is seen as a risk-free zone for practice, but you can also use it to learn emotional control and discipline.