Human emotion plays a significant role in investing and trading in the forex markets. In general when you lose money it is concerning to most people. The idea that your hard earned cash is going up in smoke is difficult for a new trader to handle. But what if losing money was part of your business. What if you planned on losing money a specific number of times and when it occurs, instead of getting angry you moved on to the next trade. The best way to handle fear, worry and greed in the FX market is to plan for their eventuality and accept it.
There is no worse feeling than having a trade that is going in the wrong direction. You plan for a specific event to take place and when your criteria is met you finally pull the trigger. For whatever reason, your trade moves against you but instead of stopping out at your targeted price level, you decide to hold on or even double down. Now the trade continues to move against you and every day you look at the price of the security and it weighs on you – sapping your confidence and your funds.
An alternative route is to prepare for eventual losses. All trading strategies should accept the premise that you will need to prepare for losses. A winning strategy does not mean you win more than you lose, instead it means that you profits are more than your losses. So if you win $500 on one trade and lose $50 on 9 trades ($450) you will still have a $50 profit. If you understand that losses are part of your strategy you will instead focus on risk management and the amount that you are willing to lose relative to your gains.
This concept might generate fear amongst new traders as it is difficult to understand the concept that you are preparing for losses. In fact, once you have found a great entry point to a trade, prior to transacting you must determine how much you are willing to risk. Once this occurs you can then determine how much the trade may make you.
Another common mistake is to become too greedy. Looking to hit a home run and ignoring prudent risk management will eventually lead to fear and worry. Using a stop loss rate may help you avoid worrying when the market turns against you. Markets don’t move in a straight line for a long period of time and eventually you will suffer losses if you ignore prudent risk management.
The key to avoiding fear, worry and greed might be to set up a plan that incorporates losses as well as specific take profit levels, which may provide you with a comprehensive strategy that hopefully removes emotion.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose.Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).
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