You’ve probably heard of the old adage: if you don’t like the heat, stay out of the kitchen. Well, Forex trading is a regular burning cauldron of fire and is certainly not for the faint-hearted.
One of the key areas that new Traders fail to take into consideration when starting out on the forex trading journey is the art of controlling their emotions. To be a successful Trader, you need to have a clear head at all times. You need to be making informed decisions, that are based on the economic market fundamentals and your technical charts, and not making rash decisions, such as trading to make up losses on previous trades, or trying to trade while your mind is otherwise engaged in other activities or trading on a whim. Ideally, traders need to be working in a quiet environment, without being impacted by external forces, such as family members, friends, TV, loud music, or other such distractions. All of these will affect your concentration and cause stress.
Trading is going to take all of your concentration because a lack of it will no doubt leave you making incorrect trading decisions, and, therefore, you will be losing more trades than you win. New forex Traders typically fund their accounts and begin trading without learning about how the forex market works. They will often have a minimum of education in this area and will often not fully understand about margin requirements, leverage, the implementation of stop losses, and, therefore, the inheritance risk that is associated with trading the financial markets. This lack of knowledge will greatly affect stress levels and whereby the overall psychology factors of trading are not taken into account.
The biggest area that is going to affect your state of mind when trading is the fear of loss. Taking losses on the chin is a prerequisite of trading psychology. Let the losers go, do not be influenced by losses when deciding on your next trade, and do not double up in order to chase losses. Just accept losing trades as a part of trading. You are not going to win every single trade, no matter how good you are. And one of the best tools that you will have in your armory in order to beat fear, is to use a stop loss on every trade. And the other important factors are to keep leverage at a reasonable level, and reduce losing trades to a small percentage of the account equity, so that should you have a few consecutive losing trades, you will still have available funds to allow you to keep trading. Most professional traders limit losing trades to 2 to 5 percent of their account balance. All of this is the only way you will know where your downside risk is, and implementing these tools will help to reduce the stress of trading.
Professional traders look for a minimum of a 2 to 1 win-to-loss ratio percentage on a deal by deal basis. That is to say, you should expect to lose, let’s say $100, with an expectation of winning $300. And with more wins than losses. And this should be at the back of a trader’s mind at all times. Trading is not a race. It’s a marathon. And it is most certainly not a get rich scheme.
And so when you think about it, psychology, or your state of mind, and particularly when trading, if controlled, will become an invaluable asset. Trading Forex is therefore not just about understanding how this market works, it’s not only taking into consideration the fundamentals when choosing to trade a particular currency pair, and it doesn’t matter how well your technical indicators are set up, if you do not have the right mindset, you are set up to fail.
Another way to help with the psychology of trading is education. Here at Forex.Academy, we supply all the education you will require in order to help you with your Forex trading journey. Therefore, soak up as much education as you can and learn what the market drivers are. Study your charts and identify why your losers happened. This will help you with your subsequent trading activity. And, if you are a novice, make sure you only trade on a demo account. Because, if you can’t be successful there, you will not be successful with a real money account.