The Biggest Psychological Challenges of Forex Trading
So you you’re looking to master trading psychology and want stay in control of your emotions?
You just passed a vital step in your trading journey without even knowing it.
Emotions are what makes or breaks traders.
Even a mediocre strategy can be profitable if applied diligently. What causes a bad trade to morph into a catastrophe is your reaction to it.
By understanding your psychology and the fear/greed that we feel when making and losing money in the markets, you can begin to put strategies in place to control them. You’ll then avoid the cry of rookie traders around the world “It has to turn around soon.. let me hold for a little longer”.
Here are some techniques you can use to help you win the battle between your heart and mind.
Lesson 1: Never fall in love with a trade.
It’s easy to become attached to trades, particularly if we’ve been holding a position for a long time. A certain sense of familiarity comes into play as the market moves up and down, your affection for the trade rising and falling with each candle.
But the market will never love you back.
The Forex market is more like a psychotic nyphomaniac with access to your ATM card than the woman of your dreams. If you marry a trade, it’ll be sure to take your house, kids and dog. Leaving you with nothing but a box of memories and a broken heart.
Treat each trade like you’re negotiating on the internet. Be an impolite dickhead. If the market doesn’t give you want you want, close the trade and say “don’t let the door hit you on your way out”. Then wait for the next one.
Lesson 2: Keep a journal
Why did you open your most recent trade?
Was it because the conditions of your strategy aligned perfectly allowing you to pull the trigger?
Or were the conditions close… but you got bored and opened the trade anyway?
Or was it because you were in a good mood due to your home team winning a sporting event and you wanted to celebrate by trading?
Write it all down! At the conclusion of the month reflect on your performance and how closely you adhered to your trading plan.
If you traded like a cold faced killer, celebrate with a beer or three regardless of your monetary success. Not every month will be a winner. The only thing you can control is how you react when the market moves, and if you had a plan and executed it precisely you’re way ahead of 99% of traders.
Lesson 3: Don’t be a Nigel-No-Friends
Trading is lonely. Long gone are the days when I would spend the morning shouting orders in the futures pit, then smash a steak over a few pints with my colleagues, to return in the afternoon for more mayhem.
Now my trading takes place in my office, in front of half a dozen screens, normally by myself.
When you’re sitting at your PC preparing your trading day it’s important to find other like minded souls to bounce ideas off and hold you accountable.
It’s one of the reasons I joined the team here at ForexSignals.com. Our trading room gives me a great outlet to discuss the markets and interact regularly with so many of you. Our community is what helps me stay level and thinking clearly.
Our trading room has saved hundreds of members from throwing their money away trading emotionally. I certainly encourage you to check it out.
Lesson 4: Beware! Leverage can be Lethal
Forex trading is wonderfully appealing due to the extremely high leverage we’re able to take advantage of. Many brokers offer up to 500:1, meaning for every $1,000 of real money, you can trade the equivalent of $500,000. Mental!
But the flip side is your account can go from $1,000 to zero in the blink of an eye. Even small movements in the currency markets will have a substantial impact on your balance. You can’t expect to remain unemotional when your account is bouncing around $100 at a time.
My friend and colleague Joel Kruger uses an innovative technique with his students in an effort to quell the excessive leverage of so many trader. He instructs them to trade a 3:1 leverage practice account and only once they have mastered trading under these conditions does he suggest clients begin elevating it.
It’s hard to get excited when you’re trading at 3:1 leverage, and this is precisely the point. Joel recognises that his students have suffered because of their attraction and excitement of making money quick. These synthetic handcuffs students trade with mean they focus on executing their strategy with a sound mind, rather than making money (which should always be a byproduct).
It sounds corny, but I truly believe you are the master of your own destiny. The choices you make will dictate your success. So next time you make a trading decision go through these checks:
- Does this trade love me as much as I love it? (No!)
- Why am I opening the trade?
- Who can I discuss this trade with?
- How much leverage/risk am I taking with this trade?
Stick to these lessons and I guarantee you’ll be a more successful trader.
If you’d like to discuss this article in more detail please feel free to comment below, or drop into our trading room during one of my live streams.
I hope to see you in there!