Handling Your EmotionsHuman emotion plays a significant role in investing and trading in the Forex markets.
In general when you lose money it is concerning to most people. The idea that your hard earned cash is going up in smoke is difficult for a new trader to handle. But what if losing money was part of your business. What is you planned on losing money a specific number of times and when it occurs, instead of getting angry you moved on to the next trade. The best way to handle fear, worry and greed in the FX market is to plan for their eventuality and accept it.
There is no worse feeling than having a trade on that is going in the wrong direction. You plan out for a specific event to take place and when your criteria is met you finally pull the trigger. For whatever reason, your trade moves against you but instead of stopping out at your targeted price level, you decide to hold on or even double down. Now the trade continues to move against you and every day you look at the price of the security and it weighs on you sapping your confidence.
An alternative route is to prepare for eventual losses. All trading strategies should accept the premise that you will need to prepare for losses. A winning strategy does not mean you win more than you lose, instead it means that you profit are more than your losses. So if you win $500 on one trade and lose $50 on 9 trades ($450) you will still have a $50 profit. If you understand that losses are part of your strategy you will instead focus on risk management and the amount that you are willing to lose relative to your gains.
This concept might generate fear amongst new traders as it is difficult to understand the concept that you are preparing for losses. In fact, once you have found a great entry point to a trade, prior to transacting you most determine how much you are willing to risk. Once this occurs you can then determine how much the trade will make you.
Another common mistake is to become too greedy. Looking to hit a home run and ignoring prudent risk management will eventually lead to fear and worry. By using a trailing stop which moves with the market or a steadfast take profit level, will help you avoid worrying when the market eventually turns against you as you give back your gains. Market don’t move in a straight line for a long period of time and eventually you will suffer losses if you ignore prudent risk management.
The key to avoiding fear, worry and greed is to set up a plan that incorporates losses as well as specific take profit levels, which will provide you with a comprehensive strategy that removes emotion.