Emotional trading is perhaps the biggest obstacle while doing Forex trading. This can impair your judgement and lead to impulsive decisions which, most of the time, result in losses. It could be fear during a losing streak or greed once a profitable trade has been made, and emotions can propel the trader to make irrational moves. Learning how to manage these emotions is very important for long-term success in the market.
Some of the best ways to avoid emotional trading is having a clear trading plan. A good plan contains your entry and exit strategies, your risk management rules, and your overall trading goals. This makes it easier to take a long-term view rather than reacting to short-term market movements. The systematic way of trading helps avoid all of those impulsive decisions which you’re tempted to do by moving according to your feelings.
Risk management is another factor that helps in the prevention of emotional trading. One of the common mistakes performed by new traders is risking too much on a single trade. The fear of losing a large portion of your account balance causes far too many emotional reactions to force you away from your plan. This will mean risking only a minimal percent of your account on every trade. 1-2% is usually acceptable. This will ensure that the impact of consecutive losses is not felt too keenly, so the calm state of mind is still maintained even if losses occur consecutively.
Another very useful tool in managing emotions is to set realistic expectations. Most novices to Forex trading enter the game thinking they are going to win the jackpot quickly, but this will ultimately lead to frustration and emotional decision-making. We need to learn that Forex trading is a marathon, and not a sprint. Accepting that losses are part of the process can make you stay down to earth and refrain from reacting emotionally because things do not go as planned.
The third method is breaking, whereby breakdowns in regular breaks are effective in controlling emotions. Monitoring markets continuously causes anxiety and over trading when market volatility is on the rise. Giving oneself time away from the screen gives one an opportunity to reset oneself before getting back at work with some fresh insight. Limiting active time in trading so that the potential emotional attachment to any given trade is minimal.
Another control tool over emotions is keeping a trading journal. Analyzing the trading journal can be highly useful in helping a trader trace trends in his decisions by recording trades, including entry and exit reasons. In the long run, one will know when emotions are controlling him and learn from those moments to make better strategies.
In Forex trading, your worst enemy may be the emotions if you let them make your choices. Proper adherence to a well-thought-out plan, proper risk management, realistic expectations, and taking breaks when necessary reduce the effects of emotions in making more rational, calculated moves by being the clear and focused mind that navigates the market.