As a Forex trader, knowing how to control your emotions is key to trading successfully.
A slight lapse in controlling your emotions may wipe out all profits from your trading account.
And to surprise you, this can happen in just one night!
After making several losses in a trading session, you will be afraid of having a losing day.
So, this fear will cause you to over-leverage.
This is what we call emotional trading and it can blow up your trading account with just a single trade.
I know you must have blown up your trading account because you lost control of your emotions.
The question is…
How many times has it happened to you?
Certainly, you don’t want this trend to continue.
That’s why I wrote this article.
I will be helping you know how to overcome emotions and trade successfully.
Let’s start…
Why Learn to Control your Emotions?
Most traders understand that trading is a game of probabilities.
Each trader should learn to control their emotions and stay detached from the outcome of each trade.
The “rollercoaster” nature of trading is traumatic to traders.
This is true for both home traders and professional traders on exchanges.
The psychological nature of Forex trade is a hard thing for any trader to get right.
Your brain has to deal with losing as well as winning, mostly within a matter of seconds.
Any trader who learns to manage their trading psychology attains a great victory.
If you’re unable to handle the pressure, you won’t go far.
This is true regardless of the trading strategy that you’re using.
The first step in gaining a trading mindset involves you, and mastering your emotions.
It is only after stepping beyond yourself a little that you can view trading objectively.
This will increase your chances of surviving and thriving in the Forex market.
If you need to become a consistently profitable trader, there are 3 aspects of trading that you MUST master.
They include….
Out of all the above, trading psychology is the hardest aspect of trading to get right.
Most traders see trading as an art, but it’s an exact science.
It’s possible for you to formulate rules within your trading strategy and follow them.
However, it’s hard for you to formulate strict rules to govern your trading psychology and control your emotions.
Fear and greed are the two killer emotions in trading.
So, how can you control them in your next trade?
Your long run trading success will be determined by the answer to the above question.
You must have read the following statements from trading textbooks…
Do not marry your position.
Don’t let fear and greed take control over you.
Stay within the zone.
Such statements are straightforward and can act as great reminders, but they offer little to no practical value.
The reason is that they don’t tell you the exact position that you should take when trading.
So,
15 Tips to Help you Control your Emotions when Trading?
Emotional trading has cut short the journey of most Forex traders.
It will be good for you to know how to handle your emotions, especially when you’re just beginning your Forex trading journey.
I want to give you 15 tips that will help you put your emotions under control when trading.
So, to keep your trading emotions under control, do the following…
#1: Analyze the Markets
You must do your homework properly.
Doing a proper market analysis and knowing the background of each trade that you take can work wonders in controlling your emotions.
Researching the markets properly will help you avoid the gambler’s mentality.
This way, your emotions will remain under control.
If you analyze the Forex market well, you will begin to understand the context price moves.
You will be in a better position to manage the rollercoaster of trades, profits, and losses.
For example, if you know things are bad in a particular company, you can consider going short or exiting your long position.
Doing market analysis can help you stay sensible about markets and trades, and come up with a winning trading plan.
With a good trading plan, you can work out your expectations and know what to avoid.
Hence, doing a deep research about markets and currencies is a great way of building the foundation for a great trading plan.
#2: Research about Successful Traders
You should take time to know what the most successful Forex traders do.
This will give you the best insights on how to trade.
You will learn the objectivity that is involved in solid trading.
You will be shocked to realize that most traders treat their Forex trades as running a business.
They don’t allow themselves to be led by emotions.
Although the goal is to make money, risk management is important.
You will benefit greatly by studying successful traders.
In any field, one can benefit from someone who has “made it” in the same field.
This is not different with Forex.
Most traders express their trading performance in terms of absolute returns.
However, it is better for you to talk about Sharpe ratios and risk-adjusted returns.
It’s not about the amount of returns you make in absolute terms, but the amount you’re risking to achieve those returns.
Teach yourself to learn from the most successful traders.
You’ll know how to manage your emotions properly both when you’re making money and when you’re losing.
Day Trading Tips to Control your Emotions
Day trading is not easy.
It is an area where the fear of making a loss can have a devastating effect.
Everything happens in a day, so the hours and minutes of the day can be unbearably stressful.
However, the most successful day traders follow a very simple trading psychology.
If you grasp the main principles, you will be well equipped to handle the roller coaster.
So, let me give you the tips that can help control your emotions as a day trader…
#3: Losing Money is OK
As long as you’re a Forex trader, you will lose money.
It will happen, and there is no way to avoid it in the long term.
Events that are out of your control will happen.
This means that no matter how much you prepare yourself, something wrong will still happen.
Yes, that’s the nature of the Forex market!
If you lose money, let it be.
In intraday trading, things move very fast.
So, expect to lose some of the time.
And if you manage to win more than what you lose, you will be making a major profit and progress.
So, let this always be your goal, to make more than what you’re losing.
#4: Remember the Business Analogy
If you win 60% of your trades, you are doing well.
As a trader, you must have the business mindset and understand that “profit” and “loss” are perfectly natural partners.
Traders don’t have the power to control the markets.
The only thing that you can control is your mindset and risk.
Ask the most successful traders and they will tell you that they don’t have a 100% winning rate.
Again, the key is not always to increase your success rate.
To remain a profitable trader, you must make more on your winning trades that you lose on your losing trades.
Actually, the most successful traders take a large number of losses along the way until a single winning trade makes their month or quarter.
Always remember this…
Target to make more than you lose, and see losses as an integral part of the game.
#5: Only Trade the Amount you can afford to Lose
Whether you’re a Forex trader or running any other type of business, you MUST observe this principle.
Each day, regardless of the mood you are in, or what is happening in your life, remember to trade the amount of money that you can afford to lose.
Of course, no one is willing to lose their hard-earned money.
However, if you’ve some percentage of your money that you’re ready to lose in the pursuit for larger gains, you will feel better as the day moves on.
If you trade more than what you can afford to lose, you will feel more stressed, forcing you to trade emotionally.
You will make bad decisions, and their impact can be catastrophic.
A bad trade may happen, but you will feel better if you realize that the world isn’t going to end.
So, stay objective and maintain your business mentality.
#6: Use the Concept of “Risk per Trade”
If you need to limit your losses and grow your trading account, risk only a fixed, predetermined, percentage of your trading account on any single trade.
This can range between 0.1% and 3%, depending on the size of your trading account.
Every trader has his own rule stating the amount he is willing to risk on each single trade, but ensure that you go with a small percentage.
You don’t have to risk 10% of your trading capital on just a single trade.
Why?
Because if you lose in a series of 5 trades, 50% of your profits will be wiped out of your trading account.
In such a situation, you’ll have to make 100% returns in order get your trading account to its previous size.
Always remember the following rule of thumb…
The larger the trading account, the less you should risk in a single trade.
So, a trader with a trading account of $4,000 can risk 4% but a trader with a trading account of $400,000 should not risk more than 1% of his account size.
#7: Follow the 6% Rule
If you fail to control your emotions effectively, they will kick in and devastate your trading day.
Always ensure that your loss limit is sensible.
Use a loss limit that makes it easy for you to manage your financial situation effectively.
The majority of successful traders set a loss limit on their open trades at a level of around 6%.
This way, the traders can stay afloat and ready to fight another day.
It’s a great way of managing your money.
If you choose to risk 1% of your trading capital for each single trade, you can open up to 6 trades at once.
However, many losing trades may wipe out your trading account.
You can’t ignore the fact that…
Every successful trader intends to cut down his losses.
Just set a sensible loss limit then continue with your trading.
That way, your trading account won’t be wiped out even if you’ve a bad day.
#8: Take a Walk after Each Trade
It doesn’t have to take long, but walking away from your trading screen even if it’s for a minute is good.
Day trading is fast and furious, and it’s easy for you to get trapped in a sea of emotions.
Taking a break from your trading screen is a physical action that you can take to control your trading tempo.
It’s a simple act that will clear your mind and remind you that you’re in control.
The market won’t drag you into a trade!
It’s the opposite.
And you can walk away from the market any time you want.
You’re the one in control!
If you’ve had a great trade, take a walk.
If you’ve had a bad trade, take a walk.
Yes, even if you had a bad trade!
If you want emotions to take over your trading strategy, just pile up new trades.
So, you have to avoid this.
Instead of piling up new trades, focus on each trade and see it as an individual matter.
Don’t see a trade as an extension of your previous trade.
Markets are not the same each day, and what worked yesterday may not work today.
Each trade should be a well thought out trading decision, underpinned by technical analysis, macro-fundamentals, and risk management.
#9: Identify the Least Volatile Hour of the Trading Session
Take advantage of this time to read a book.
Most strategies for day trading work well when the price action is volatile.
Trading when the markets are going nowhere leads to frustration.
Anger then follows.
Next, your emotions are broken.
To avoid this, identify the least volatile hour of the trading session and take a break.
Read the latest novel from your best author.
However, this is not the right time to read anything related to trading.
Trading books give trading ideas.
You may be tempted to put those ideas into practice immediately.
Any trading idea is a losing proposition before becoming part of a consistent trading plan.
So, don’t put any idea into practice before it becomes part of your trading plan.
#10: Don’t Trade after Three Successive Wins or Losses
Once you make three consecutive wins, you will feel like a super trader.
You will think that it’s impossible for you to lose.
So, what is the impact of this?
You will over-leverage and over-trade.
This is a dangerous path that can leave you with regrets.
On the other hand, if you make three successive losses, you will see yourself as a loser.
But you don’t want to lose.
So, your emotions explode!
You run a revenge trade.
After the occurrence of an event in three consecutive times, you’re most likely to be affected by it.
So, evade this problem by stopping to trade after three consecutive wins or losses.
#11: Don’t Look at your Profit or Loss while Trading
There is no figure that causes a huge surge in emotions than your profit and loss figure. Most traders see their profit and loss figure as an expression of their self-worth.
That’s wrong!
You have to realize that you’re greater than you profit and loss.
Adhere to your most important trading rule and use a daily loss limit.
You will stay protected from making severe losses.
With that in place, you don’t have to keep on checking your profit and loss figure.
So, any time you feel like peeping into your profit or loss for the trading session, just read your trading rules.
This will protect your emotions from surging during the trading session.
#12: Determine whether you’re Scared
Fear is a dangerous emotion that most traders struggle with.
So, as you watch your trades unfold, just ask yourself the question…
“Am I scared?”
If you find that your answer is “yes”, just exit that trade immediately.
If you continue to trade while in such a state, you will be putting your hard-earned profits at risk.
So, it will be better for you to exit the trade before it is too late.
Also, keep on reviewing your trading rules regularly.
To minimize your loss, reduce your trading size.
Why Technical Analysis is good to Control your Emotions
Doing technical analysis is one of the ways of controlling your emotions.
When you consider the biggest traders of all time, you will realize that they have one thing in common.
Which is…
They have strong technical analysis skills.
If you take time to know what the markets are like each day, and observing trends over time, you will be in a better position than majority of the traders out there.
When it comes to picking currencies, you will be picking the ones with the potential to increase in value.
This will make you unique from other traders.
However, you must admit that technical analysis takes some time, but it’s something that you need to know as a trader.
If you invest some hours in technical analysis, it will help you improve your trading mindset.
So, do what you can to understand it at a competent level.
However, I don’t mean that you become like George Soros, but understanding the basics of technical analysis is of great importance.
If you apply your technical analysis knowledge in your daily trades, you will feel less stressed, putting you in a better position to manage your emotions.
This will in turn increase your chances of running profitable trades.
Common Mistakes of Newbie Traders to Avoid
As you progress in your trading career, there are a number of traps that you will encounter.
These are worth noting as you work towards mastering emotions.
They include…
#13: Fear of missing out (FOMO)
This is a common problem with newbie traders, especially new day traders.
It is where you see a trader or other traders making a big win on a particular option then you jump in.
This is a great mistake.
Why?
Because you will have jumped into the option at the wrong time, hence, you end up incurring a huge loss.
Such a trap can be avoided by following your own trading rules and focusing on making informed decisions.
Having trading rules and following them consistently can help you avoid deviating from the right trading path.
Always remember this…
NEVER chase the market for trading opportunities!
Good setups will always form over and over again.
As a trader, you have to follow your trading strategy strictly.
The FOMO effect is a great avenue for any trader to make devastating losses.
So, beware of it!
#14: Pace Yourself
So, you’re doing well in one month, making huge profits from your trades.
Next, you decide to double your trade amounts in the second month.
That’s an error!
Always learn to graduate your investments.
This is the best approach for you to build a business mentality, and keep your finances protected.
The Forex market is very volatile, so, don’t let your finances remain the same.
You may double your trade amounts today, only for the market to reverse, wiping out your whole trading account.
If you want to raise your investment level, do it incrementally and after a careful consideration.
If you’re following the risk-per-trade rules that we discussed earlier in this article, your trades will expand and become larger with time as you grow your trading account.
A 3% risk-per-trade will not be the same with a $2,000 and with a $20,000 account
A higher position size means higher risk and more profit potential.
However, it should be supported by a more trading capital.
#15: The “Good Day” Trap
This is where you wake up to an exceptional run of good trades and you feel that everything is going on well.
If you are lucky, and you have analyzed the market well, this trend may continue perhaps to the end of the day.
However, it may not be your lucky day.
There are factors that are out of your control.
One of such factors may happen.
So, play every trade as it goes and let your goal be to make an overall profit.
If it means you back off, just do it.
In most cases, when a trader records a series of winning trades, they begin to feel invincible in the game.
What happens after that is that they are overtaken by greed and they forget to make rational decisions.
This often leads to high losses.
In some cases, the losses may be too high such that the entire trading account is wiped out.
You now know the dangers of emotional trading.
If you practice what has been discussed in this article, you will overcome emotional trading, the number 1 enemy to most Forex traders.
This will mark the beginning of your journey towards becoming a successful Forex trader.
Conclusion:
This is what you’ve learned in this article:
Instead, learn to graduate your trades gradually and after a careful consideration