Controlling your emotions when trading forex can identify the difference between success and failure. Your mind state has a significant impact on the decisions you make, particularly if you are new to trading, and keeping a calm demeanor is important for consistent trading.
In this article, we explore the importance of How To Control Your Emotions When Trading Forex, for both beginner and experienced traders.
If you think that excellent risk management strategies are enough to make you a successful forex trader, think twice! One of the keys to success in forex trading is emotional intelligence. Emotional intelligence, defined as one’s ability to understand and manage their emotions, can have a detrimental effect on decision-making.
No, we are not here to give you a lecture in pop psychology. We are here to help you make rational decisions and become an expert in trading forex. Simply keep reading on!
And do not forget that our forex course is also available to help you master the art of forex trading.
Forex Psychology and Emotional Intelligence
Even though we all know that emotional experiences lead to a wide range of behavioural and cognitive changes, trading psychology is often overlooked in forex trading and education.
From revenge trading to impulsive trades, though, it’s clear that a trader’s personality is as essential as their knowledge and expertise. To become a pro in the field of forex trading, one needs to be flexible, self-disciplined, informed, and ambitious all at the same time - all signs of high emotional intelligence.
Emotions and Forex Trading
Should you listen to your heart or head; that is the question? The truth is that emotional responses are natural states of evolutionary importance, so no surprise that forex traders are not immune to them.
Only when we learn to recognise and manage our mental responses, emotions can help us become winners in the forex industry.
Coping with negative coping strategies
It’s not a secret that the roots of our decision-making strategies lie in our childhood. Conditioned to react in a certain way, people transfer their childhood experiences into their life. Unfortunately, forex traders make no exception and some start trading without being aware of their own coping strategies.
For instance, a person who has never been praised as a child can internalise shame and see their trading losses as a personal failure. The truth, however, is that forex trading is like a minefield full of random outcomes and the only certain thing is its uncertainty.
Fear and forex trading are not a good pair
Risking and learning to let go are two essential steps to become a real player in the forex trading world. While we have to agree that losing a trade can trigger unpleasant emotions and fears, fearful actions are not advisable.
Interestingly, in the popular forex trading book Trading in the Zone, known as the bible of trading psychology, Mark Douglas describes four common fears: fear of missing out, fear of loss, fear of being wrong, and fear of letting a win turn into a loss.
While fear benefits survival in the wild, both fearful economic behaviour and loss aversion can play a bad joke on you. To provide an example, even when you have a good chance to win a trade, your fear can cloud your decision-making strategies and make you quit. Unfortunately, figures show that approximately 95% of forex traders lose large amounts of money and quit.
The role of greed in trading
The antidote of fear is confidence. While confidence is crucial to success, overconfidence in trading can play a trick on your forex trading strategies. Greedy forex traders often risk large amounts or stay in a trade for a long time, which can lead to huge losses and negative feelings.
Here we should note that the use of trailing stops can be a helpful strategy to help forex enthusiasts control their greed and reduce losses. On top of that, forex traders are encouraged to keep position sizing consistent while trading.
Cognitive biases and euphoria
Greed can result in unrealistic feelings of superiority and euphoria. Lured by overconfidence, some forex traders tend to place unplanned trades and forget about their trading strategies. In fact, recency bias is a common psychological flaw among forex traders. Recency bias is defined as the mental tendency to focus solely on the most recent periods in forex trading and winnings.
Another common mistake triggered by distorted decision-making is confirmation bias, defined as people’s tendency to look at data that can support their ideas. To provide an example, a forex trader who is overconfident may ignore pieces of information and charts that confront their unrealistic ideas.
Forex and the blues
It’s not only euphoria that can cloud your forex trading decisions, though. Any strong emotion or deep feeling can have the same negative effect. One of the worst moments to trade forex, for instance, is when you are feeling down and trying to suppress your personal problems.
At the same time, losing streaks can lead to depression. This can also lead to the so-called anchoring bias - the tendency to interpret the future by referring to the past. Some forex traders tend to ignore the fact that the market conditions keep changing all the time and simply keep lamenting over their past losses.
The attribution of blame and forex trading
When our forex trading strategies fail us, it’s normal to experience disappointment and sadness. Yet, when we start doubting our abilities to succeed in life, when we start blaming ourselves for factors we cannot control, then it’s obvious that we are unable to control our emotions.
Blaming ourselves for our losses can only lead to extreme feelings of guilt, which can be unproductive. After all, the forex market is full of possible outcomes - not certainties. No surprise that good forex traders are those who are mentally prepared for the worst.
How to Control Your Emotions While Trading Forex?
Though experience, knowledge, and risk management are all factors to consider when trading forex, it’s the basics of forex psychology that can help us become successful traders. As stated above, deep emotional experiences can cloud our decision-making strategies, so emotional training is fundamental.
To escape the traps of your mind, you should have realistic observations of the overall market situation. Here are some tips to help you manage your emotions and improve your decision-making strategies while trading forex:
- Take a break: When you are feeling overwhelmed by emotions and self-doubt, it’s better to take a break. Better than ending up losing everything! Engage in behaviours that can help you move on. Take a walk after a trade, for example.
- Do not trade out of greed or other strong feelings: Forex trading is a complex field. Do not forget that trading based on emotions can lead to huge losses. After all, as forex trading is full of possibilities and changing factors, it requires adequate risk-management strategies. Forex is not a gambling game or an easy way to make quick cash!
- Engage in emotional training sessions: Only when you are fully aware of your flaws, then you can become a better forex trader. Patience, discipline, and objective reasoning are three vital qualities to help you become a pro in the forex industry. Though it takes time to evaluate your own trading strategies, personal training is totally worth it.
- Develop realistic plans: While forex trading can bring a rush of adrenaline, we have to stay realistic. Developing an objective working plan, as well as keeping a realistic attitude, can help us master the art of forex trading. As the market is constantly changing, we can’t expect to have thousands of pounds in our trading account all the time. Realistic expectations are the key to successful forex trading!
- Learn to move on: Getting obsessed with a trade can play a bad joke on you. Do not forget that decisions to move stop losses and profit levels can only add fuel to the fire. Stop looking at the charts, do something during the most volatile period of the trade. Accept that losing and winning go hand in hand and understand that the forex market is marked by changing conditions.
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- Given the fact that negative coping strategies can cloud your decision-making, explore the roots of your self-doubt, shame, and insecurities before you dive into the amazing world of forex trading.
- Never trade out of fear or greed, sadness or euphoria. Strong emotions will only cloud your decision-making and trading strategies, which can result in unrealistic thinking, cognitive biases, and feelings of guilt. Blaming yourself for external factors and markets, for example, is a clear sign that you are prone to unrealistic thinking.
- Emotional training is crucial to help forex trainers to understand how to move on. Patience and discipline are fundamental qualities to overcome poor risk management and trading strategies.
- Practical solutions, such as a short walk during a trade, can help forex traders manage their stress, fears, and obsessions. Only when you overcome your insecurities, you’ll be able to accept the fact that there’s nothing certain in forex trading.
To sum up, forex trading is much more than financial knowledge or pure luck. Forex trading is a complex field, with emotions being a major player. As a matter of fact, forex trading and forex psychology are two sides of the same coin.
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