Any person who has ever invested their hard-earned money into a financial market that is traded on margin or leverage might have noticed that as the amount of money that they are working with grows, so do the emotions that you experience when the value of your account and open positions fluctuate up and down. The worst thing for a trader to be owned by your emotions and thereby have your judgement clouded, so these six tips will help you to own your emotions and not the other way around.
Triple Your Demo Account Twice Before Trading Live
Trading demo accounts is something that every trader should start with whether you are trying a new trading software for the first time or are just trying out a new trading strategy. In order to trade in a calculated way and not an emotional way, you must have confidence in the accuracy of your market analysis skills and in yourself, and this can be fostered by gaining experience as a trader. However, when you are trading a demo account you do not need to risk any of your own money, so if you follow this tip then you should become a good enough trader that you could step in and grow literally any trading account regardless of size, making it far less probable that you will lose money when you switch to a live account.
Keep A Trading Journal That Documents Your Trades
This step is probably the one that most people skip because they immediately say to themselves "Haha, that's dumb" and never are able to gain the tremendous benefits that this can have. It might seem like a childish exercise to try and write down the emotions that you feel when you trade, but you can keep this journal to yourself and for that reason you can be honest when you do it. You can just use a simple notebook, and you should write down the date and approximate time of trading, the currency pair you are trading and whether you buy or sell, the entry price and exit price, and also if it was a winning trade or losing trade and whether it was compromised by trading emotionally.
Do Not Fund Your Account With Money Crucial To Your Life
One of the best ways to make your trading a highly emotional and stressful experience is to fund your live account with money that you cannot afford to lose, because you will literally freak out if you see the market moving against you. While trading in the foreign exchange market is inherently risky especially when you are using the high amount of leverage that is typical with this market, you are still taking calculated risks that have an established probability of being profitable over time. When you take the paycheck that you need for groceries and put it into a trading account, this is called gambling and you would probably be better off to take that money and put it into slot machines or buy scratch off lottery tickets.
Leveraging Your Money Leverages Your Emotions
There is a vast amount of power that is placed into your hands when you are allowed to trade open positions in excess of 100 times the value of the allocated capital in your trading account, and underestimating this power can spell disaster for a forex trader. Trading a currency pair like EUR/USD at a 1:1 ratio would mean that each pip is worth .10, but change that to your typical leverage ratio of 100:1 and each pip is now worth instead. But as you magnify your money in this way you will also magnify the emotions that you experience when you see this money increase or decrease in value, so make sure you never lose scope of the power that comes with highly leveraged trading.
Never Enter If You Don't Know When To Exit
There is a popular saying that goes "wealth is not the money you make, it is the money you keep." Well when it comes to forex trading, success is not in the pips that you earn but it is in the pips that you capture when you exit the trade. With this in mind, your exit strategy is arguably more important than your entry strategy, especially when it comes to minimizing losses. Never enter into an open trade without both a predefined profit-taking level and a stop-loss level, because without establishing your exit level on both sides you open yourself up to making spontaneous decisions based on your emotions.
Simple Market Analysis Is Better Than Overly Complicated Analysis
There is a condition that a trader can suffer from called "analysis paralysis," which is when you load your price chart with a dozen different indicators and then read the hundreds of items streaming through the news feed, and while trying to discern a usable trading signal through all that noise you end up with nothing but a headache. Instead of doing this, it is better to ignore the news feed and only put two indicators on your chart that you fully understand, because simple analysis is always more practical than making things too complicated.
Following these six forex trading tips should help you to master your emotions while trading, and should allow you to separate yourself out from the majority of traders that wipe out their first live account and never again return to trading because they were completely controlled by fear and greed.