As a beginner trader, you are taught or learn by experience that you need to acquire and posses different skills for you to have the proper skin in the trading game. These include: Strong numeracy skills, excellent communication and interpersonal skills, physical and mental stamina, independent thinking, decisiveness under pressure, integrity, discipline and the list is endless.
You might be thinking, what has physical and mental stamina have to do with trading financial markets and forex. Trading not only involves looking at the fundamentals and technicals rather it involves being in the right mental state in order to analyze properly both the technicals and fundamentals. Containing emotion, thinking quickly and being disciplined all encompasses what we refer to as trading psychology.
Having a proper trading psychology helps the trader to become disciplined and stick to their own trading plans. This helps you know when to lock in profit and book your calculated losses. Emotions simply should not get in the way of a trader. But they do, most, if not all of the time.
Here are some ways you can overcome emotional trading:
Take breaks away from trading to cool off.
Indeed trading is demanding and highly engaging. I mean, you are looking at charts, drawing trend lines, plotting Fibonacci retracements, analyzing and not to mention your hard-earned money is invested here. However, the most advisable thing to do is to set-up all your risk parameters; stop loss, right risk to reward ratio, your take profits and your perfect entry into the trade. You now need to sit back and let the markets take their course. You should be stress free knowing all the right risk measures are in place and you are equally positioned to expect your take profits.
Have a trading journal
A trading journal is helpful to traders in that it guides you based on what you have put down for yourself. If you are set to take 3 trades in a day, 3 days in a week. That should be your guide. As a trade, you will come to find it easier to look at the items you document on your journal in order to help you look back and assess your past trades, furthermore it will help you find ways to avoid your past mistakes.
Avoid revenge trading
While trading, it is imminent that you will encounter losses. As a trader, when faced with consecutive losses, provided they are calculated and expected, it is only right that you take time off in order to avoid revenge trading. Revenge trading is a natural and emotional response when a trader suffers a significant loss. Before taking time to think about the next move or looking at their strategy, they enter another trade after their big loss with the idea of recovering from the loss immediately. Multiple losses can put a trader in a state of panic which severely degrades your decision-making process.
Stick to your trading strategy/plan
Traders are advised to have a trading strategy/plan that they use to execute their trades. Successful traders use one or combine various strategies they are familiar with, in that they have back tested them and they have successful trades using the same strategy over time. Sticking to your strategy helps you from hoping from one strategy to another which likely will not work in your favor.
Lower your trade sizes
The leverage and lot size in a trade could have a huge impact on your trading account. A trader with a small account of $500 Dollars is highly advised to consider using a nano lot size i.e. 0.01 lot size and leverage of minimum 1:10 to maximum 1:100. Forex brokers offer 1:500 maximum leverage which new traders find attractive not knowing the consequences of trading on such accounts.
Being in control of your emotions while trading helps traders avoid trading recklessly and will be on their path to success in trading forex. Assessing your own performances and reflect on past trade. This reflection and assessment helps a trader to correct the mistakes, change negative habits and achieve overall success.
Join us at Nairobi School of Forex to learn more.