Kick Crying and Other Emotions to the Curb while Trading in the Forex

One thing that a forex trader cannot afford to do is become too emotionally involved in currency trading. Often, a trader will exhibit many of the emotional behaviors more frequently associated with habitual gamblers, such as chasing losses, and overtrading. By keeping your emotions in check, you can avoid these pitfalls and give yourself a better chance for success in currency trading.

One behavior that is easy to fall into if you're not careful is chasing a loss. It is a tough thing to incur a loss of money, as it sets you further back in your goals, and goes against the very reason you became involved in forex trading in the first place - to make money. After all, you're not spending long hours reading research reports and studying Bollinger Bands just for the fun of it. So often the first instinct one has after suffering a loss is to recoup that money very quickly in the form of another trade. When these emotions run high, many times the novice trader will quickly execute a trade without putting in the required due diligence to see if the move is a smart one. This often leads to bigger losses, which just compounds the problem. Another rash decision that is sometimes made is to take on additional risk to help recoup the loss by increasing the amount of leverage the trader uses.

By borrowing a larger amount from the broker, the thought is that one can recoup the loss more quickly while also staying on track to reach the day's profit goal. This works great if the currency moves in the right direction, but if the trader guesses wrong a market call can ensue, particularly if the amount of margin used is close to the maximum amount the brokerage will allow. Market calls lead to an even bigger loss as the entire position is sold by the brokerage to pay the outstanding debt. The best way you can avoid this happening is to treat each trade independently, and not look back at the past. Once a position is closed out, it should be finished in your mind. There's nothing you can do to go back and change anything anyway, so the best thing to do is just start fresh with the current balance in your account, and put all your focus on making a smart decision in the next trade.

You should also avoid becoming too obsessed with watching the market and analyzing each position. While it is important to do all the required research and to pay close attention to each trade, overanalyzing can lead to overtrading, which can result in losses or at the very least leaving money on the table. Many times a beginning trader will pull the trigger too quickly to close out a position at the slightest hint of a dip or bad news, when in reality fluctuations are normal for the market. By constantly churning through positions, a forex trader will ensure that the only profit taken in the whole process will be by the brokerage, as the spread and commissions will eat his portfolio alive.

One way you can avoid this is to set at the outset a hard price limit at which you wish to close out the position, both above and below the price of the original trade. These limits, particularly the stop-loss, should be wide enough to give the currency room for its normal fluctuations without closing out the position too early. But by doing this, all of the emotion can be removed from the process, and once the price rises or falls to the target level a trade can be executed to either take the profit or limit the loss.

It can be easy to let your emotions take control of your forex trading, but this can lead to disastrous results in both the short and long term. By avoiding this tendency, you can become a cool, calculated trader and maximize your profits.

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