Contents
The Forex exchange market requires a lot of skills and knowledge in order to be a successful trader. Knowing investing strategies or various tools usage is very important however when a trader can’t control their emotions, nothing really makes sense. This is because feelings and emotions as well as the psychology of an investor influence a great deal the trading processes and their performance. If one can not manage his emotions and is impulsive or fearful towards each action he takes, that might end up losing a big amount of money and also a very important opportunity.
Controlling emotions while trading includes two major feelings: fear and greed. Getting scared when the market goes in the wrong direction is a very natural thing among all kinds of traders. It also can be caused by mistakes that someone makes while investing in the Forex market. In that cases, people often make wrong decisions because of their mindset at the given moment. Greed is also not a great feeling as it can have a bad impact on the risk management process and may trouble a trader to generate a substantial profit.
There are also various other types of mindset that an investor can have while trading in the market. In most cases, psychological factors are a very big obstacle for them because it always has a great impact on the final decisions. There are several things that should be considered by the trader in order to avoid the latter. First of all, they should identify the emotion and try their best to destroy it at the very beginning, before it gets uncontrollable.
In this guide, we will further discuss the main features of emotional trading, why is it so bad, how it affects the investors’ decisions, and how to control emotional trading in general.
Understanding Fear and Greed
As we have already mentioned, fear and great are the most common feelings that one can experience while trading FX. Each one has its own causes that need to be considered carefully by an investor. First of all, it is important to note that fear is caused for some specific reasons in the Forex market. In many cases, the main reason why a trader feels scared is the too big amount of invested capital. This is a natural thing because a large investment also means a high probability of losing it. However, when this feeling of fear has no limits and is totally uncontrollable, there is a chance that it will end up in a great loss.
Besides, when traders get bad news about the market it is not surprising that they immediately get scared. This feeling of fear becomes the reason why investors inadequately assess the situation and try their best not to risk any more capital. On the one hand, no risk means no loss. However, one should always remember that risk management and its control is one of the irreplaceable parts of the Forex market, and with not risking it at all, they will not be able to generate payouts. Therefore, stopping emotions while trading is a key factor that every professional investor suggests.
In order to avoid this type of unpleasant situation, one should identify the potential threats in advance. That way traders will be aware of how to react to them and to form a healthy response to the feeling of fear. This attitude is indeed very beneficial not only for the investor’s successful trading but for their mental health as well.
Greed is another very common emotion while trading in the market. A lot of people might believe that greed is not a negative feeling however, it is related to the very bad consequences in terms of Forex trading. In many cases, greed is the main reason for traders’ impulsive actions that might cause destructive results. When a person is acting under the influence of this emotion, they can’t analyze properly what they are doing because they just have an urge to do it. In this kind of situation, there is a high probability that people can’t even manage the potential risks, they lose an opportunity of rational thinking because all they want is to trade more at the given moment. So control of your greed while trading is another essential thing in terms of emotional trading and it should be taken into account in order to avoid the above-mentioned disturbing situations.
Other Important Factors
One of the important factors related to emotional trading is a wrong feeling of hope. Usually, this happens when an investor had a positive experience in the past and is going to continue trading with even the bigger positions because they think that if they won once, this tendency will also be kept in the next trading. However, we all know that this is not the case. Every person should consider that unrealistic hopes might have a very negative effect on the final results.
Besides, another noticeable thing is that being too anxious or too excited is also not a good sign while trading in the Forex market. In many cases, these feelings indicate that something is very wrong in the process. It might be caused by a lot of things. For example, the emotion of anxiety may be caused by too large positions or breaking the rules of the market. First of all, these kinds of things can be avoided in advance in order to stop emotional trading and protect yourself from the unpleasant situations that follow the latter. However, if an investor already has these feelings, they should try to balance the amotion’s level and don’t let it ruin the trading process. Besides, sometimes asking yourself why you feel so, is the best way to overcome unwanted emotion.
On top of that, it is important to consider that being bored while trading is also a very common thing in emotional trading. This often becomes the reason why traders don’t pay much attention to what they are doing, what kind of strategy they use, and how they are implementing it in the investing process. So this situation would definitely not end up well for a trader. Besides, being bored might also mean losing a lot of essential opportunities in the market because of the lack of attention. Boredom is not a very surprising thing but when it comes to the loss of actual money, attention is something one should never lose in the trading process.
In addition to that, the feeling of frustration is also a very usual part of emotional trading. This happens when investor misses trades, make some mistakes, breaks the rules, lose a too big amount of money and so on. The reasons might be endless. However, stopping emotions while trading sometimes is too hard, especially when it comes to frustration. This is because disappointment is usually related to unchangeable negative facts, however, one should try their best not to let this emotion ruin the future of their trading career.
Emotional training is closely connected to the experience of the trader. For example, professional investors are ones who have very big experience in the market which means that they have gone through almost all-time emotional pressure, so they already know how to handle them properly, without destroying their funds. However, beginner traders are exactly the opposite. They don’t have experience at all in the market so they aren’t aware of all the difficult situations and struggles that one can come across in the Forex market. In many cases, this is why the newcomers become the victims of their emotions and lose money because of their uncontrolled feelings.
How to Avoid Emotional Trading?
Controlling emotions while trading is not an easy process. It requires a lot of moral effort as well as good market knowledge. In cases of psychological struggles, traders are recommended to create a set of rules and follow them in order to maintain balance. Besides, as we have already mentioned above, they should identify their emotions in advance. The main idea behind this is that we should be so ready for the specific feeling that when it actually comes, we will take a quick response and act so reasonably that it will not interfere with our trading process at all. On the first try, it will not be as easy as it seems, however, after practicing a lot, traders would notice that they are starting to manage their emotions better than ever.
On top of that, another important thing is that missing trades is a very common thing that causes emotional trading. In order to avoid the latter, one should decline the level of risks. Low risks mean a low chance of losing investment capital and less fear as well.
Besides, another very essential factor is believing in yourself and be confident in every trading strategy you choose. That way you will manage to minimize the number of emotions in the trading process that will help you be more reasonable in every action and gain a substantial profit in the end. Moreover, after gaining confidence, it stays room for increasing trade size which means generating more wealth than before. However, in many cases, confidence is related to the level of experience one has in the market. So confidence is very hard to find for beginner traders. Therefore, it also hard for them to stop emotional trading at the first attempts.
The Bottom Line
Emotional trading is the process when a persons’ trading decisions are affected a great deal by their feelings and emotions. This is a very big hindrance as it has a very negative impact on investors’ final results and their trading performance.
In this guide, we have already discussed that two major parts of emotional trading include the feeling of fear and greed. Each one has its own causes that need to be taken into account by an investor. For example, there are a lot of cases when the feeling of fear becomes the main reason why traders inappropriately assess the market situation and try their best not to risk any more capital. That way they lose an opportunity to generate a substantial profit.
Besides, there are other important psychological factors that also are a part of emotional trading, including unrealistic hopes, regrets, frustrations, boredom, too much anxiety or excitement, and so on. Those factors were already analyzed fully in this article so investors should take close attention to them and try to remember the main factors in order to avoid unpleasant circumstances in the future and to manage to stop emotions while trading.