As much as technical and fundamental analyses are cognitive application skills, one cannot remove the emotional response that comes with failure in the markets. Dima Chernovolov states that each type of emotion uses a portion of a limited amount of our mental energy; hence it is wise to use it sparingly and effectively. For many Forex traders, failure in the markets may impact on them negatively and that is normal, we’re human after all. However, allowing that emotion to rule you in the markets is detrimental as it will affect your following trades and eventually your portfolio.
The control of the implementation of your trading strategy as well as money management is compromised by your ability to weaken destructive emotions and strengthen beneficial emotions. The inevitability of the markets presenting challenging, if not disappointing situations is something all traders must understand. You may win most of the time, but you won’t win all the time. Weakening destructive emotions is the ability to acknowledge failed trades, remaining calm and behaving in accordance to their strategy. Most times, Traders may act out of impulse in a failing trade by adding more money to a losing position (Averaging down) or disregarding the importance of stop-losses when the market moves against them.
One of the easiest ways to limit these emotions is to enter into the Forex robot market, and have a system trade on your behalf. This isn’t the approach everyone subscribes to, but it certainly takes emotion out of the picture.
Destructive emotions are considered as twin brothers. Fear and Greed are two of the most destructive factors that could throw most traders off their initial course.
- Fear: The fear of losing money, wiping out the whole account, placing the wrong trades, of risk…the list is endless. Fear is usually a defense mechanism against an undesired outcome or a result of a past experience. This could result in missing out on really good opportunities in the market or exiting trades too early.
- Greed: The indulgence in the prospects of winning more often and larger amounts. While it is arguable that greed could be a contributor to trading on the markets, the incorrect balance could then lead to placing an increased amount of trades, averaging up or down, irrational trade decisions etc.
With regard to the twin brothers above, I’d say a fair amount of both is required. To overcome fear and greed is to understand that you’re not trying to find all positions, your simply finding opportunities that could make potential profits. Even when using Forex robots you can still run into these twin brothers, but you have to have faith in the automated system, or else you can get in your own way by manually intervening, and causing yourself headaches.
Beneficial Emotions are as follows:
- Confidence in one’s Forex robot: This is very important, your EA is your identity on the markets, it defines the way you make money there. If you don’t believe that your strategy won’t work, then it won’t work. Why place money on the markets with a faulty strategy?
- Commitment: This is also an important beneficial aspect of trading. Traders have to remain committed to making money on the markets despite the losses and short term gains. The long-term commitment is what will be measured when your portfolio value is assessed.
- Limited emotional involvement: This is a necessary additive to your trading. As emotional as losing money can be, it’s important to limit your emotional connection to the markets in order to make rational decisions. Remember, trading is not romance.
A new and growing trend in trading Forex is algorithmic and Forex robot trading (black boxes) removes the emotional aspect of trading. This is where trades are executed automatically based on a computer program which is set, either by mathematical equation or statistical analysis. There has been reported success of this new way of trading which is growing and that is perhaps one way to avoid the consequences of emotions on the markets.
Emotional management is the rational decision-making process that doesn’t eliminate the emotional aspect, the effects of emotions are integrated and acknowledged, but also minimized.
The stick-to-approach is useful in emotional management:
- Learn to experience emotions with regards to trading. It’s okay to be impacted negatively or positively by the happenings of the market.
- Avoid entrenching emotions: Do not allow one loss to turn into a series of losses due to the fact that you made a loss. Avoid the “loss mentality” after making a loss on the markets. This negative perception begets another negative perception; coupled with the emotional response your activity on the markets could become sloppy.
- The more you deviate from you trading system, the more you are at risk of acting out of impulse: If you are not following your own strategy, you are either improvising each trade or acting out of emotion. This unstructured way of trading could lead to losses.
- Expectations: We all have expectations or at least ambitions of being successful on the markets. Why else are you trading? However, a common mistake is that when expectations don’t match reality, traders don’t act in accordance with their strategy. Another aspect to this is to have realistic market expectations. Not every trade is a winning trade.
- The mastery of emotion: The ability to steer your emotions in the direction of where they should be, instead of where they’re currently at. A lot of discipline, self-motivation, hard work and introspection are required.
- But do remember that as much trading may have an emotional aspect to it, trading is not meant to be emotional.