Forex trading can be an emotionally challenging venture. As currency prices fluctuate throughout the day, impatience, fear, greed, biased thinking, and indecision often lead traders to make the wrong moves.
If you’re wondering what is forex trading and how you can manage your emotions to ensure success, this guide is for you. Here are four tips and strategies you should follow to stay calm and directed throughout the trading day:
- Stick to Your Trading Plan
One of many reasons traders incur losses is by deviating from their trading plan. They make a series of good trades and believe they can make more money by entering more trades.
On the other hand, a trader might get stubborn and hold onto a position, hoping it will turn around. The best course of action is to close down a bad trade as soon as possible.
No matter the situation, stick to your trading plan. Know which currency pairs you’re going to trade, how much loss you can tolerate, and what the acceptable risk-reward ratio is for you.
Abandoning your trading strategy for a move that appears profitable can lead to emotional trading.
- Take Breaks
Forex trading follows a rapid pace. You need complete concentration for prolonged periods. The best way to avoid decision fatigue is to take a short break after each trade.
Breaks help clear mental fog, allowing you to make informed decisions. They also give you a chance to de-stress and regain emotional control. Stepping away from the screen and simply stretching your legs can help you avoid emotional trading.
- Educate Yourself on Psychological Biases
Psychological biases can impair a trader’s ability to interpret trends in the forex market. Educating yourself on biases is the first step in managing emotions. Here are two common psychological biases every trader should know:
Overconfidence Bias
Confidence is one of the standout qualities of successful traders. But any more or less of it can impact your trading decisions. A trader might believe they have created a winning, bullet-proof strategy. Traders also overestimate their ability to predict the market. As a result, they take rushed decisions and make high-risk bets.
Anchoring Bias
When a forex trader heavily relies on initial information, such as a price level or forecast, they’re exhibiting anchoring bias. Traders fail to assess or consider new information, which hinders their decision-making abilities.
While biases can’t be cured, their effects can be mitigated. Understand cognitive biases so your trading moves don’t work against you.
- Keep a Trading Journal
Another effective way to avoid emotional trading is to keep a trading journal. You can note down the specifics of each trade and reflect on them. For each trade, mention why you went long/short, what the profit/loss margin was, and why you were right or wrong.
At first glance, keeping a trading journal might seem unnecessary and time-consuming. However, for traders who fear their emotions might get in the way, a trading journal can make a world of difference. It will help you identify your weaknesses and stay disciplined in the long run.
