Even most experienced traders have a hard time ignoring the emotions when trading. All of us, traders, fall victim of emotional roller-coaster once in a while. Today let’s talk about ways to overcome the mistakes, avoid serious setbacks and manage to control our emotions the best way possible.
Emotions will always accompany traders from all over the world simply because this is human nature and emotions are built into it, whether you like it or not. And no matter how advanced the technological innovation has been, for as long as we remember, emotions always get in a way of human rationale.
This article will go over some of the most critical mistakes made by most traders. By acknowledging the problem, it is easier to recognize it, control the situation and hopefully address the potential pitfalls before falling in.
The Biggest Mistake
Let’s all close our eyes for a second, put your pride aside and think about the last horrible trade you have had. Ask yourself the following questions:
What were the reasons for the trade to turn out so badly?
Did you ignore your plan?
Did you move the position far beyond the initial stop value?
Did you have a stop value at all?
Did you have a plan before you entered the trade?
Did you set the price levels at which you want to close the position?
I believe that the biggest mistakes we all make in forex trading are the wrong risk-reward ratios. The reason to it is quite obvious – we like to win. There is no trader that doesn’t enjoy a good winning trade, and I am definitely not an exception. And just like I truly LOVE to win, I honestly HATE to lose.
This overwhelming urge to win every single trade is one of the biggest problems you have to face, because this is one of the factors that cause you to lose money.
Here is an interesting fact: even if traders win more than they lose (in other words, they make profits at the end of the day/week/month), at the bottom of each of these successful traders is the feeling of loss, because we are educated from the moment we are born that mistakes are bad. We always try to win on each trade, although it is the most irrational agenda when it comes to forex trading.
Let’s go back for a minute to that last bad trade you made. What caused you to hesitate to close the trade? Why did you let this bad trade take over your mind and make things from bad to horrid?
Here is why – you were gambling with the thought that the price will come back to your entry and you will successfully close the position out. If this never happened to you, you have never traded forex before!
This overwhelming urge to win each trade brings devastating and expensive blow-ups, which can lead to a complete crush of your trading account, self-esteem and overall expectations from forex.
Here is couple of more examples of emotional trades where your intelligence is clouded by emotions:
A trade moves against you and you just cannot let go, literally praying for the position to come back. Here the greed got the best of you.
A trade moves in your favor and you totally freak out and close the position early, fearing that the “luck” will reverse and leave you with the loss. Here the fear got the best of you!
How to Prevent the Emotional Trading?
First of all, get used to the fact that markets are unpredictable. Even with the most reliable technical and fundamental analysis, nobody knows for sure what will happen in the future. The same way you plan your daily routine, sometimes even the most obvious and seemingly uneventful day can turn into rollercoaster within seconds.
Analysis of the market gives your probabilities and is not 100% reliable. So given the fact that you might be wrong with your predictions, you must have a plan B, instead of praying and hoping for the prices to come back to your favor once again!
Never enter a position without a solid exit plan. Place a stop at a price level where you are comfortable with the unsuccessful trade. Only when you have placed the stop, you can concentrate on the profit goals and the risk involved.
It might feel uncomfortable to have strict discipline at first, but that’s ok. Forex is all about long-term agendas and not short-term bank robbery!
Plan your trade and trade your plan. This MUST be the daily motto of all traders who wish to make real money with less possible risk.
Choose the Right Broker
Depositing money with a forex broker is the biggest trade you will make. If it is poorly managed, in financial trouble, or an outright trading scam, you could lose all your money.
Take time in choosing a broker. There is a five-step process you should go through when deciding on which broker to use. You should consider what you want to accomplish, what a broker offers, and use reliable sources for broker referrals. Then, test the broker using small trades at first, and don't accept offers of bonuses with their services.
Never Risk More Than You Can Afford to Lose
The key part of your risk management strategy is to establish how much of your capital you are willing to risk on each trade. Day traders ideally should risk less than 1% of their capital on any single trade. That means that a stop-loss order closes out a trade if it results in no more than a 1% loss of trading capital.