psychology

Emotional Trading

Mastering the psychological elements of trading is an immensely important yet the most neglected aspect of forex trading. Many few traders consider emotional trading to be an important aspect of forex trading. And the traders who have mastered trading emotions are the ones who are successful in forex trading.

Every human being is different, and every human being has different emotional issues which are very hard for them to tackle. If you are able to manage and control your emotions rather than allowing it to control you, then you have unlocked some great potential for yourself. 

Types of emotions you will encounter while trading forex and the ways to deal with it.
 

1. Fear

Fear is an unpleasant feeling triggered by the perception of danger, real or imagined.

In the more straightforward terms, fear is the survival instinct present in every human being, which often causes us to make certain decisions. These decisions may or may not be beneficial to us.

Let us understand how this affects our trading.

There are different situations which causes fear in every trader while trading. 

FOMO (Fear Of Missing Out)

Fear of missing out is a widespread psychological problem which almost every trader has gone through. 

Many times when you trade, you must have noticed that when seeing your setup, which is perfect for you makes you feel very excited. And in fear of missing that particular trade, you enter too early and mess up with your risk to reward. 

Fear of losing a trade

Whenever you go through a streak of losing trades, you develop this fear in your mind, which is not even real. This fear is produced in your mind because you have a wrong belief stored in your mind, which says that the losses can be avoided.

This belief keeps you out of the upcoming trades because your mind is trying to avoid losers and hence has generated fear in your mind. This fear if not appropriately treated, can lead to other emotional trading problems.

You have to understand that losses and failures are a part of the success, and they are inevitable. No forex trader ever existed who never lost a trade, and there are no holy grail strategies or indicators which will offer you a 100% win rate. 

 

How to deal with fear?

The very first thing you need to understand is that every emotion you feel is interconnected to each other. So, if you keep yourself disciplined enough to follow your trading plan, the chances are that you won’t get affected by this fear.

FOMO

We have always said this to new traders we meet and to our students, that forex market is full of opportunities, and the opportunities will never stop coming. 

So, to deal with FOMO, what we want you to do is, keep reminding yourself the very fact that the forex market is full of opportunities. So even if you miss one trade today, you will get another chance soon. But if you mess up with your entry, then it may be disastrous for your account. So, always enter a trade only when you get a confirmation of your setup.

Fear of losing a trade

Always remember that ever trader has incurred a loss and losses cannot be avoided as it is a part of success in forex trading. Whenever you go through a losing streak, the most effective way to deal with it is take some time off from trading.

Go out, do something different, and keep your mind fresh. We are humans, and if anything goes wrong, every human being feels emotions. Now, if these emotions are not taken care of, it can worsen your conditions. So whenever such things happen to you take a short break from trading and let your mind get through it. After that, come back and try to analyze what went wrong and then start again. 

 

2. Greed

As a secular psychological concept, greed is an inordinate desire to acquire or possess more than one needs. 

In terms of trading, greed occurs when getting into a trade, and that turns out to be profitable, you add unnecessary entries on that particular trade so that you earn more profit. Or when you see a good setup, you get too excited and enter with a larger lot size than you should have used. 

Many times you get into a trade which turns out to be profitable, but you still don’t get out of that trade even if your target is reached. This happens because greed is not letting you take the profit in a desire of making more profit. This later goes against you and makes you lose the profit which you should have earned.

Greed is the biggest enemy of an individual in any business they do but in terms of forex its the account killer.

 

How to deal with greed?

We still remember our early trading days, when we used to make good profits trading with our plan. But we used to get greedy thinking about the get rich quick scheme and often lost our accounts. After repeatedly making the same mistake of being greedy, we finally decided to overcome it one fine day. 

What we did was, we started making long term goals and started working on it step by step. We promised ourselves that we would stop being greedy and will always take one bite at a time. 

Always remember, you can make a million-dollar if you survive in the market, greed is your only enemy who is not letting you do that. If you can survive in the forex market, you win half of your battle there itself.

Set some goals

When you set yearly goals and work on them step by step, it will most likely help you deal with your greed. It gives us a sense of meaning and purpose. It points us in the direction we want to go and gets us interested and engaged, all of which are good for our overall happiness.

When you work for your goal step by step, you give your 100% on completely that step, and this takes you one step closer towards achieving your goal.

 

3. Hope

Hope is an optimistic state of mind that is based on an expectation of positive outcomes with respect to events and circumstances in one’s life or the world at large.

In terms of trading, hope can be your enemy or your friend. It depends upon your own perspective.

HOPE AS YOUR ENEMY

Hoping that the market will always be on your side is the biggest misconception every trader has, forex trading does not work like this.

Consider you entered a trade without a stop loss and that trade is now in a drawdown, hoping for that trade to come in your favor can be devastating for your account. Sometimes it may work but not always, and the one time it won’t work, will be very disastrous for you. 

HOPE AS YOUR FRIEND

The forex market can be a ruthless place for the lighthearted person, as it may break down a person to a deeper level. Many a time it happens with every forex trader that their strategies don’t work, they fail to analyze the market correctly. Sometimes, a trader does everything right but still fails.

At this time, hope is what keeps them going and don’t let them quit. Hope when used properly can be a very powerful thing.

 

How to deal with hope?

The very first thing you should understand is that forex trading is not a gamble. It is a pure business, and you can't just have any expectations in business, you only get what you work for. 

If you risk everything you have on a single trade and then expect the market to move in your direction, then it won’t happen. This is not how forex trading works. 

The only way to deal with this issue is to follow the right risk management plan. By doing so, you accept that every trade you get into has a risk involved and losing that trade is a part of trading. When your mind gets used to with this behavior, you don’t expect anything from the market.

When you don’t expect anything from the market, then you keep yourself away from hoping the market would turn your way.  You start improving yourself instead of hoping something from the market.

 

4. Regret

Regret is a feeling of sadness about something sad or wrong or about a mistake that you have made, and a wish that it could have been different and better.

Regret is related to a perceived opportunity. Its intensity varies overtime after the decision, in regard to action versus inaction, and in regard to self-control at a particular age. The self-recrimination which comes with regret is thought to spur corrective action and adaptation.

When it comes to forex trading, regret often comes in due to various other reasons. Sometimes when you don’t get into a trade due to the fear of losing, and if that trade turns out to be profitable, then it often causes regret. Regret is also caused when you risk too much of capital on a single trade and end up losing that trade.

 

How to deal with regret in forex?

According to us, there are two types of regrets that affects a forex trader the most.

1. The regret of not getting into a trade.

It happens to almost every trader, sometimes we are not able to decide if we should get into a trade and we finally let that opportunity pass. When this opportunity which we passed turns out to be a winner we get into huge grief of not getting into that trade and then regret it.

You should understand that in forex staying out of a trade is itself a good trade. You should make yourself immune to this regret of not getting into a trade, as this will always be happening from time to time. And forex market has plenty of opportunities as long as you have money in your account.

It may sound a little crazy to you but to get immune to this very emotional problem we would stop ourselves from entering a trade and we would just watch that trade moving. Sometimes in our desired direction and sometimes in the opposite direction. What this did to us is that it made us immune to this emotional trading problem and now we no longer have any issues regarding it.

2. The regret of risking too much on one single trade.

The only way to deal with this problem is by mastering the discipline. When you are disciplined enough, you won’t go against your risk management plans. If you don’t go against your risk management plans, you won’t be risking too much on one trade. And if you are not risking too much capital on one single trade, then you will have nothing to regret about.

 

5. Frustration

In psychology, frustration is a common emotional response to the opposition, related to anger, annoyance, and disappointment. Frustration arises from the perceived resistance to the fulfillment of an individual’s will or goal. Frustration is likely to increase when a will or goal is denied or blocked.

In more simple terms, the feeling of being upset or annoyed as a result of being unable to change or achieve something.

In forex trading, frustration can be terrible for you, as frustration is the leading cause of every emotional trading problem. We believe that frustration triggers all the trading emotions. Frustration can start a cycle of emotional trading issues and hence, can be very bad for you.

Consider you are not able to complete your goals, and this makes you frustrated and to deal with this frustration you do some terrible things. 

For example, to complete your goals and to end your frustration, you choose to increase your lot size, and hence, you are increasing your risk. And if this trade goes against you, then it may lead to regret. This cycle will then keep on running until you stop it. Frustration can cause greed, greed then leads to regret and regret, then leads to fear and hope.

 

What are the causes of frustration in trading?

1. Bigger goals per step.

When your goals per step are very big, and you are not able to achieve it, it may cause frustration. This frustration then causes several emotional trading issues and makes you do things which you should not do in the first place.

2. Frustration due to external factors.

Many times we go through bad times, and we have no one to share it with, and then if any friend or a family member taunts you regarding anything, then it could get you frustrated.

3. Frustration due to past losses.

When you are not able to win in the forex market, it often makes you feel frustrated, and many times you feel like quitting.

 

How to deal with frustration?

1. Set realistic goals.

The most efficient way to deal with this goal is to have small steps with a realistic goal. If you have a realistic goal, then doing the necessary steps will make you feel content and happy with yourself. And if you are happy, then you won’t be frustrated.

2. Take a break.

If you ever feel frustrated about something, stop trading for some time, take a break. In this break do, whatever makes you feel good and happy and only start trading again when your frustration goes away.

 

Things you should consider to avoid emotions in trading.

Improper risk management leads to emotional trading problems. No matter if you win a trade or you lose one, if you risk too much on one trade, you will surely experience emotional problems.

If you risk too much on a trade and that trade turns out to be a winner, it will make you overconfident and may also result in improper trade execution. If that trade turns out to be a loser, it may affect you psychologically and make you do things which you should not do.

For example - making up for the losses by ignoring the trading rules. This will eventually make your trade management poor, and make you lose your capital. This happens with every single person if they let their emotions control themselves. All successful traders have control over their emotions and don’t let the emotions control them.

Mastering emotions is the most important aspect of trading, and only a few traders give it the due importance. The emotional issues are directly related to your confidence in the trading system and sometimes the ongoing trade. No matter if you like it or not, emotions will always wriggle into your trading.

Most traders think that they won’t let the emotions come in between their trading and try to keep the emotions out of trading but fails. They get upset when they lose a trade or are on a losing streak. Quite a lot of traders have a very difficult time removing emotions from the trading decisions.

Is it really important to remove those emotions from your trading? Can you remove those emotions from trading?

Removing emotions from your trading is next to impossible. You cannot do it. Instead, you can work a little smartly and control your emotions and direct them in a good direction.

Now let’s try to understand this clearly, what really leads to destruction trading? Is it really the emotions? If it is the emotions, then try to think from where these emotions occur?

The fact is that emotions occur due to improper risk management. Emotions occur when the risk becomes too much.

For example, consider you got into a trade without proper risk management and took a very large position. Now if the trade goes against you, you get over emotional and regret taking that trade and not following the risk management. Now to try to make up for the losing trade, you again do something foolish, and take wrong trades or use a large lot size. This leads you to lose your capital, and the only thing you are left with is regret.

What is causing this emotional issue in your trading? It is improper risk management and lack of trading rules.

The only thing which will help you control this is, using a proper risk management plan and a proper set of rules for trading. No matter how wonderful the setup looks like, never avoid your risk management plans and the trading rules.

 

How to Avoid Emotional Trading?

how to avoid emotional trading
 

1. Pre-planning the worst trade scenario.

What you have to do in this is, simply use the risk management techniques and assume a setup won’t work and will go against you. In this case, think how much loss are you willing to take and place a stop loss at that place.

Calculate the maximum drawdown you can get from that trade according to your trading system and use a lot size accordingly.

Do the same thing with each and every trade you take, now what will happen is if you take some losses which you have already calculated and this happens over and over again, you become immune to it. Those losses won’t affect you because you know it was a calculated risk, and one trade can make it even. This technique will help you counter the emotions very effectively.

 

2. Using Trading rules.

This can improve your trading results in a very effective manner. It will help you to avoid the wrong setups.

What you have to do is, take a notepad and write down the rules to get into the trade.

For example. If you have four rules for selecting a setup, do not enter the trade unless and until these four rules are satisfied. While analyzing your chart, make sure to check whether all the rules are satisfied or not. This will not only help you in selecting a good setup but will also improve your confidence.

Always remember that in the forex market a time will come when the market will make you believe that you don’t need to follow the rules this time, but trust me this is an illusion which the market creates, and every time you get such illusions you will have to choose to stay with your rules.

 

3. Mastering Discipline.

It is said that discipline is the bridge between goals and accomplishment, and this is absolutely true when it comes to forex. Every successful forex trader is a person who has mastered discipline. He is the person who is disciplined enough to follow his plans and knows that he have to stay disciplined no matter what. Because being disciplined helps you to focus on your goals clearly and in forex, it avoids 90% of emotional trading problems. If you want emotion-free trading, then you have a master discipline.

To win in the market, you will need to have a set of rules and then discipline to follow those rules, because the market moves in a way which creates illusions and makes you believe that you do not need to follow the rules this time.

Discipline is the only key to avoid this illusion, and the discipline is the key to success in forex. This is the number one trading psychology which you need to master to be successful, and this will not only help you in forex, but it will also help you in your day to day life.

So, practice self-discipline and don’t be afraid to fail. Just make sure you never quit.

 

4. Setting a Goal.

Having goals for things we want to do, and working towards them is an integral part of being human. The path towards our goals may not always run smoothly or be easy, but having goals, whether big or small, is part of what makes life good. It gives us a sense of meaning and purpose, points us in the direction we want to go and gets us interested and engaged, all of which are good for our overall happiness.

No matter what you do to earn money, to be successful, you need to have a vision. You need to set realistic goals and try to achieve it (one goal at a time).

If you don’t have a goal, you need one. Try making monthly goals and work harder to achieve these monthly goals.

 

5. Treat trading as a Business.

People have a very wrong mindset about trading. They treat it as a gamble and get mad when they lose money. The entire scenario could change if you treat your trading as a proper business and act in the same way you would do with any other business.

What you need to do is treat your trading as a real business. Every morning when you get up, set up some daily activities and achievable goals as you would do in any other business. This will help you keep out the emotions and improve your results drastically.

 

Conclusion

These five points will help you control your emotions in trading and will eventually help you make profits consistently.

Emotional trading is the psychological problem which happens with 90% of the traders. This is the essential aspect of trading though very few traders consider it and work upon it.

Trading is 80% psychological and 20% strategical. Yet 99% of traders give their 90% on improving the 20% skill.

How do you expect to be successful in trading when you are giving only 10% importance to the thing which is 80% important?

In order to be a successful trader, one should always master self-control and be able to do emotion-free trading.

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