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Forex Trading: Emotional Control in the foreign exchange markets is a “Must Have” for any Forex Trader

In the previous three articles, we have touched upon the basics of foreign exchange markets trading and noted that the key success factors are knowledge, experience, and emotional control. The latter one may be the most important of this triad, yet many traders neglect this attribute at their own peril.

Trading psychology is a burgeoning field of study that attempts to catalogue the various negative influences that our minds can generate trading in the foreign exchange markets, especially when trading under pressure in the foreign exchange markets with real money on the line.

Several studies in the past twenty years have confirmed that our emotions can undermine even the best intellectual framework devised for decision-making.

We tend to magnify our losses, forgetting our good trades altogether, and then the “scrambling” begins in earnest.

Entering a position is a positive event. Most traders do not stumble at this point. Hope springs eternal when a new opportunity jumps upon our screen.

The trouble comes when it comes time to sell. Suddenly we remember the last bad trade we made or how we cut off a loser just before it rebounded for a big gain. We “freeze”, unable to pull the trigger, as our emotions get the best of us and create a “detour” from our trusted trading plan in the foreign exchange markets.

Procrastination sets in until the loss is too heavy to sustain. We close our position, defeated once again.

Not a pretty picture, is it? This outcome need not have happened if we had stuck to our “step-by-step” trading plan, implementing its rules right on down the line. Allowing oneself to get emotionally involved in a trade is a recipe for disaster for a trader.

The only tried and true prescription for avoiding this negative flow of events is to practice your trading plan on your “demo” forex account until it becomes habitual. Trading demands a cool head, a disciplined approach, and business-like decisions.

In line with achieving emotional control, there are also bits of wisdom that traders have passed down over the ages to solidify positive trading thoughts in their minds. Here are a few insights gained from years of experience:

  • “Only risk what you can afford to lose”: Foreign exchange markets trading is high risk, and only a portion of your investment capital should be devoted to this risky activity;
  • “Take what the market gives you”: As an individual trader, it is extremely difficult to compete with the likes of major global banks and hedge funds. It is like tiptoeing amongst the elephants, so to speak.

    You must pick your spots to invest and close when appropriate. Resist the temptation to pick market bottoms and tops cleanly. Wait for confirmation of a pricing trend to ensure better and more consistent results. Do not get greedy;

  • “Cut your losers early, and let your winners run”: This statement is easier said than done. Forex trading is as much about losing trades as winning ones. You must accept this fact and move on. Do keep a journal to analyze your mistakes and refine your trading plan.

    A batter in baseball never expects to hit every pitch, but he looks for singles – doubles, triples, and occasional homeruns will occur over time. Learn to be patient;

  • “Never bet the ranch”: Manage your position sizes according to proven money management techniques. Your objective is to return tomorrow and trade another day!
  • Successful foreign exchange markets trading is about experience, skill, and consistency, not gambling or getting lucky. Be patient, have fun in the process, and remember -- it’s all about knowledge, experience, and emotional control.

    Risk Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.


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