Forex trading psychology begins with a simple truth: the trader's number one enemy is emotion, whether positive or negative. This truth contrasts with the message of many advertising campaigns that rely on emotions, mainly euphoria, to stimulate public curiosity. The problem is serious: if a trader, whether experienced or not, allows emotions to play a significant role, their effectiveness drastically decreases. The risk is losing one's capital and abandoning the trader's career.
Why Emotions Have No Place in Trading
Why are emotions so dangerous? First, they are out of place. Forex trading, like trading in general, is not a hobby. It's not entertainment. Of course, one can have fun, but that's a side effect. The trader must conceive of Forex as a speculative investment activity, which it is, a serious commitment to oneself. Far from being a game, it's an activity in which skills and intellect must be poured. There's no room for emotions. This is one of several such realities; see seven hard truths about forex trading.
How Emotions Cloud Judgment
Then there's the human factor. Emotions compromise lucidity and the ability to make decisions. And the more stressful the event, the more difficult it is to react to difficulties. This applies to both positive and negative emotions. For a rules-based way to sidestep emotional decisions, see how the Ichimoku Cloud works.
Fear and Its Costs
Fear, for example, paralyzes. It pushes the trader to ignore opportunities, to miss one train after another. Fear, and specifically the fear of losing one's capital, is not at all rare in Forex trading. If it's not possible to eliminate it completely, it must at least be kept under control.
Euphoria and Stress
Euphoria, perhaps resulting from a particularly successful trade, is equally harmful. It makes one reckless, pushes one to do rash things, to act in a risky manner. The same goes for stress, even if it's not exactly an emotion. Stress is a fundamental element, extremely recurrent. When present in the right measure, it increases effectiveness. When excessive, it compromises decision-making abilities. It too must be kept under control.
Keeping Emotions Under Control
How can a trader banish emotions or at least control them? Simple: transform operations into something automatic, reduce the space for decisions. This can be done in two ways. One, by drafting a totalizing strategy, i.e., one that takes into account all eventualities, but at the same time flexible, so that the trader knows exactly what to do and when to do it.
Two, by relying on robots, i.e., practicing automatic trading, which almost completely excludes man from the phase in which emotions risk taking over. The operation, precisely.
