As humans, we are prone to having instincts and emotions. These can have a significant impact on trading performance. No matter how good a trading strategy is, negative emotions that are not controlled can have a detrimental affect on results. If a forex trader is not aware of their emotions and enables them to impact on their decision making, this can cause mistakes to be made.
Forex trading successfully is already hard enough, let alone if you also have to battle with your own emotions which is unnecessary. In this article, we will look at some of the negative forex emotions that should be avoided and ways in which you can avoid them.
Overtrading is something that I see all too often, especially with beginner forex traders. Overtrading basically means that you keep entering positions one after the other for no particular reason. I personally believe many aspiring forex traders think the more trades that you open, the more success you will have. I don’t think this is the case at all.
I would rather take one potentially big winning trade than increase my exposure with hundreds of small trades. It is a lot less stressful, takes less time and allows me to use higher chart time frames for analysis which I believe helps to filter out market noise that can occur in lower chart time frames.
Overtrading can cause anxiety, fear of missing out, confusion and unnecessary losses. Nobody can possibly capture every single market move with perfection. I wouldn’t be trying to chase every single opportunity and make sure that I have a forex strategy that I stick to no matter what.
Fear is another common emotion that applies to forex trading just as it can in day to day life. Fear is manifested in various ways that can all have an impact on your trading activity and cause you to make many trading mistakes that you know you shouldn’t.
The fear of losing often makes it difficult for traders to close a trade and thus they hang on which can cause bigger losses. There may be a fear that a winning position is going to become a losing position so the trade is closed prematurely. Then you have the fear of missing out on a trade so you force enter a position that isn’t actually there.
These are just a few examples of the many ways fear can creep into your trading. If you have a strict trading plan in place and become aware of fear as an emotion, you can gain more control over your decision making.
Greed is another one of the seven deadly sins to make its way into the negative forex emotions list. Greed can cause traders to make too many spontaneous and reckless trading decisions which they would otherwise have avoided.
This is another emotion that often has an impact on new traders. Traders may have one good trade, get carried away and then enter another out of greed. I have seen aspiring traders on many occasions believe that they can make a million over night and then do all sorts of things to try and achieve this.
The greed can cause them to give up on a trading strategy after just one loss, use very dangerous money management techniques such as grids and martingales, over leverage their accounts, risk money they cannot afford to lose, fall victim to forex scams and much more.
Trading requires patience and discipline. It can take years of studying and practicing to become a successful forex trader, there is no “holy grail” solution where you can become a millionaire overnight. If you do find it, please let me know!
Hope, fear, and greed can frequently occur together in forex trading. When you are in a losing position, you may show signs of hope by failing to recognize the loss at an early stage and allow the market to continue moving further against you in the hope it will turn around.
Traders can also show signs of hope when they enter a random trade with a large position size and no consideration to the trading strategy in order to try and compensate from previous losses. Whilst they may hope to make back some of their losses, more often than not it can cause further losses which sets of further negative emotions such as fear and anger.
Traders can get anxious when they are in a trading position which can lead to prematurely exiting the market or adjusting money management in a way that does not conform to the rules set out within the trading strategy.
Anxiety can also occur whilst waiting for a potential trading opportunity. In this instance, a trader may force a trade out of anxiety that is not actually a valid trading signal.
Traders can also get over excited and end up taking trades that do not fit within the trading plan. They may also see a trade in profit and exit it early as they are excited about having a winning position. With so many currency pairs to choose from, a trader can also get carried away and try to trade multiple currency pairs and chart time frames in order to have as many trades as possible. I would try to remain calm and stick to the plan, treating trading as a business rather than a game.
At times when you are waiting for a trade, it may become boring which can cause a trader to lose focus. You may discover that you are bored if you keep going over the same analysis and charts repeatedly without proper knowledge of why you are doing so or because you are waiting for an opportunity that may or may not come.
Boredom can also make you miss the correct entry point if you are lacking concentration. To counteract boredom, you may wish to take regular breaks from trading and trade at a suitable time when you are most awake and focused. You could also set price alerts to send you email, SMS or pop-up notifications so that you do not need to stare at the chart all day and night long.
This is another common negative emotion that nearly all traders will experience. Forex frustration or anger can occur when you make a mistake or have a losing trade. You may take a bad entry that goes against your rules or risk more than you should have. When you get angry and frustrated, this can make things a lot worse.
Often these emotions take away from the event that actually happened when in reality it could be a good idea to admit the mistakes and try to learn from them moving forward. You could develop a trading strategy that suits your style and make sure you stick to it so that you have less chance of getting frustrated. Traders need to accept that losing is a normal part of forex trading and if they cannot cope with that then perhaps it would be best to avoid trading altogether.
How to avoid negative forex emotions?
To help avoid negative emotions, I would have a solid forex trading plan in place along with sensible money management, good forex discipline and psychology. I would also keep track of my trading progress and note down any emotions that I encounter within a forex trading journal. This can act as a good tool for reflection and to become aware of your emotions which you can then look to control in the future.
Practicing your trading strategies and controlling your emotions on a demo trading account with a forex broker can be a good way to help improve your trading psychology. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.
Just keep in mind that your emotions when demo trading may feel different from when you trade on a real account as there is not the same risk involved when using virtual funds. However, you may also open a real trading account and trade with a small amount that you feel comfortable with in order to help familiarize yourself with a live trading environment.
Forex emotions conclusion
Hopefully you now have a clear understanding on the emotions involved with forex trading and ways in which you can avoid them in order to help improve your overall trading performance.
It is imperative to remember that every forex trader is different and thus, what works for one trader, may not work for another. You should try to understand yourself well as a trader, discover what strengths and weaknesses you have and choose a trading style that is suitable for your personality.