It's a fact that if you don't adopt the right trading psychology, when trading currencies online you will lose money and this is outlined by a fact which is ever present in trading – over 90% of all traders continually lose money so why is it so hard to get the right Forex trading psychology and beat your emotions? Let's take a look.
In the points below, you will find some simple tips on how to get the discipline all the pro traders have to control their emotions but despite the fact emotions have such an impact on traders, many new traders enter the market thinking that, they can handle the emotional side of trading easily so for anyone who thinks gaining emotional control is easy.
Be Prepared for the Impact of Emotion
Most traders spend the majority of their time hunting out the best trading strategy or system. Some spend huge amounts of man hours building their strategies and doing research and others hunt online for the magic bullet trading system – the one which can deliver big profits with low downside volatility.
The problem with Forex trading is losses. You are going to get losses when trading conditions are not in line with your strategy and contrary to what you see written online by many so called experts a trading strategy CANNOT adapt or predict when trading conditions will change. For example if you have a trend following strategy, you will find it will lose most of the time – why?
Because, markets spend the majority of their time ( around 70%) moving sideways or in trading ranges. If you have a trading range strategy you will make smaller profits and also will lose heavily when markets are trending strongly. There is no way of avoiding losing periods and even the best strategies, will face several months of trading at a loss as losing trading signals exceed winning trading signals and profits are bigger than losses.
If you have any trading strategy which is based on sound principles, it will lose for long periods. Sure, it it has a trading edge it can win longer term but the periods where it losses will test a traders discipline and he or she will need to beat their emotions to follow the strategy without deviating from the systems rules.
Forex is one of the only businesses where even if you are professional, you will face losses where you can make no excuse – you are wrong. An attorney who losses for a client, can blame the strength of his clients case and a salesman who doesn't make a sale, can blame the product or the quality of the leads but the currency trader, has no such excuse to make – he got his market timing wrong and that's all there is to it.
In life and business, no one likes to look stupid but in Forex trading this is what happens all the time and it's hard to cope with mentally. If making money is important to you as it is to most people, losing it is an emotional experience. You can also add in the fact that its seen as a bad trait to be wrong and take losses in business and being wrong hurts our egos. So any trader who follows a trading system can look forward to weeks or months of losses and losing more trades than he wins! Sure he can win long term but trading through draw down periods and taking losses, tests our discipline – so how can you overcome losing periods and trade with discipline?
Read Stories of the Pro Traders
One of the best places to start in learning how to handle your emotions and control them is - to read some of the stories of greatest traders of all time. So go to Amazon and get books such as Market Wizards and the New Market Wizards by Jack Shwager which will give you an insight into how the great traders handle losses, why its so important not to lose your discipline and how to keep your eye on the bigger picture of winning long term. You can also get some other great books and the ones we rate highly are – What I learned Losing a Million Dollars by Jim Paul, The Disciplined Trader and Trading in the Zone both of which are by Mark Douglas. There are others but these 5 books, will give you an insight into how pro traders deal with losses and what you need to do to win. There are others, so simply check out our top investment books and book reviews, for more essential currency trading education on the importance of having the right trading psychology.
Demo to Real Account Trading – Start Small
Demo account trading is easy – there is no pressure and you should keep this in mind when stepping up to trade with real money. There is no comparison between demo trading and trading for real. A good contrast is trying to sink a put in Golf, playing with your friends and trying to hit the winning stroke in the Ryder Cup! The difference is one scenario, has no pressure and in the other, your under intense emotional pressure.
When you start trading for real only trade very small size positions so you can get used to the feeling of trading under pressure. You cannot prepare yourself for how you feel when trading real money – you have to experience it. Start small, while you get used to the feeling of trading real money and this will help you gain experience and of course, preserve your account equity at the same time. It will take several months, to over a year ( depending on the traders personality) to become full confident in trading a system and having the confidence, to trade it in a disciplined fashion.
Write Your Trading Rules Down
If you write the rules of your trading plan down, you will have more chance of following them. If you don't write them down and have them in your head you will be tempted to deviate from the rules and make exceptions to stay in a trade and run ,losses – don't do it. Write them down and tick them off and only then, execute your trading signal in the market. It's a simple trading tip but it will, reinforce confidence and discipline.
Stops Entered on Trading Signal Entry
One of the most important tips, any trader should learn when entering a trade in the market is to enter a stop loss at the same time as a fresh trade is entered in the market. NEVER run mental stops! - If you do, you will be tempted to let your loss run and hope it turns around.
Some of the best traders of all time, have let losses run, because they didn't have their stop in place right away so make sure you have a get out point, your happy with the risk your taking and assume your going to be wrong from the start and from this point – things can only get better. Again placing stop orders, at the same tim, as a trade is a simple tip but one which will save many traders a lot of money and stop the temptation to allow a loss to run.
Why is it so Difficult to Trade with Discipline?
You are under several types of pressure when trading which include – no one likes to lose money, your ego hurts when you are wrong, you are against an opponent ( the market) which is all powerful and its always right and only you can be wrong. In addition, society conditioning teaches us that being wrong and looking stupid, are not traits of successful people. Furthermore in society, most people are used to the effort or intelligence = financial reward. You get paid for being intelligent or the hours you work in most professions but none of these normal rewards, apply when trading currencies. You are ONLY rewarded for being right and intelligence and the work ethic, are not rewarded.
If you see the FX markets for what they are which is an area where if you change your mindset you will win – you will change your mindset. Forget the short term losses and focus on the huge rewards long term which mental control will give you. Focus on the long term reward and forget about your ego and short term losses and you will become a successful currency trader from home.
Final Words Achieving Emotional Control
Controlling your emotions is vital in terms of executing the rules of your trading strategy with discipline. It's a fact, that most traders, don't pay enough attention to this area of trading currencies and end up losing so don't make this fatal mistake. Take time, to make it an essential part of your Forex trading education and it will be time well spent.