Great forex strategy and all those trading tools available today are just not enough to be successful. A trader needs to work hard on the psychological strength, since whenever there is money involved, fear and greed mixes in. Without control over these emotions, a trader has difficult time following the trading rules and therefore fails to make rational decisions. What are the signs of greed and fear? What are the ways to buy despite the fear and to sell despite the greed?
1. Let’s consider a typical “greed and fear” scenario that many beginners in forex trading experience.
2. After overall successful demo trading, you open a micro account with, let’s say, $300.
3. The next morning you have more than tripled the account and turned your initial deposit of $300 into $1,000.
4. The potential of tripling your account daily is making you intoxicated with greed. You already imagine yourself as a millionaire in the very near future.
5. Since you have already tasted the winnings, your confidence level is rising fast. You decide to make couple of more trades before the end of the trading day.
6. Not only you want to trade more, you feel the need to trade bigger lots. The greed has a complete control over you now. You have ditched the trading plan completely.
7. You open couple of more trades and boom – everything goes wrong this time.
8. The trades are bad but you hope for reversal.
9. Forex market rings the bell – the trading day is over. Your unfortunate trades, however, are still open. Your account balance is down to $500.
10. The next day, in hopes of rebound, you start revenge trading. Your positions are open and you hope for a breakeven.
11. All of the sudden you do profit - something around $200, however you are still in loss. Feeling hopeful again, instead of closing the trades, you decide not to. After all, you did make money just now. Maybe luck is on your side this morning.
12. Unfortunately, things don’t go as planned and you finally close the positions several hours later with a loss of $250.
13. Account balance decreased in half, but technically you are still a winner. After all, you started with $300. There is still a chance to get back on the horse and rich the mouth-watering sum of $1,000. So you look for couple of more super good trades.
14. You are anxious and greedy.
15. The next day you start trading early in the morning, before forex market actually wakes up. You trade well with small profits of couple of pips. Your account funds are increasing with no more than $5 per trade. You realize that it might take you several days to actually reach $1,000 with this speed!
16. Forgetting that there is a possibility of losing even with small steps, you rush ahead, hunting for every possible trade of $5. Guess what happens next? You lose $200 because forex market went the opposite direction. Once. Twice. Three times.
17. You are freaked out, upset, frustrated and totally disappointed. Your account balance is $30 and you have become yet another classic case of a newbie in forex trading.
So, what happened there? Why did you make every mistake possible although you read and learned about each and every one of them before trading live? Why you couldn’t stop a disaster? Here is what happened from psychological and technical point of view:
First of all, you thought that you are different then other forex traders – smarter, sharper, better! All those rules, pitfalls and horrible worst-case scenarios do not apply to you. Unfortunately, after forex trading experience similar to described above, you are proven wrong in a matter of seconds. It is disappointing, sad and frustrating.
Fear and greed is what happened to you. Forex trading is not just about buying one currency and selling the other. Many beginners don’t realize that forex trading involved complicated network of money and risk management, self control and trading plan that needs to be followed no matter what.
If you traded in a similar way mentioned above – you were gambling! Instead of trying to understand what needs to be done when a position goes wrong, you were seeking to hit a jackpot, become a millionaire in one day and never work again in your entire life! Whenever things went wrong, you panicked and sunk even dipper in the loser mud.
Also, seems like you don’t have a trading rules or trading system yet. There is no hope in forex trading – it has to be done with a military precision – it is either left or right. That’s it! Forget about hopes and wishes otherwise you will end up miserable and most probably quit trading all together.
The fact that while hunting for a $5 profit (on the early morning trades) you lost $200 when market when the other way suggests that you didn’t use stops! Or, even a worse thought, your risk/reward ratio is out of hands!
Summary and Review
To summarize, in order to have consistent profits in forex trading you need to set very clear rules. Don’t try to catch everything around you. Look for trades that are rational and which you can explain – Why are you entering it? What do you expect from it? What is the possible loss?
And remember, even if you miss one opportunity, there is always another right around the corner. Control your fear and greed. At the end of the day, it is not what you could have made – it is about what you have got in the account.