There is one constant message that is drummed into every Forex trader – trade based on logic, not emotions. Unless you can control your emotions, you will start to make trades for which there is no real justification. This in turn leads to losses – which can quickly deplete your trading capital.
However, it’s all very well to say you need to control your emotions, but unless you know how to do this, all the advice in the world isn’t going to make any difference. The problem is that as a human being, the advanced, logical part of your brain is often overridden by more primitive, emotional areas that are very difficult to suppress. Therefore, you need to take specific steps to make objective decisions, rather than just thinking you are being logical.
One of the biggest mistakes that you can make is to try to outsmart the market. Even if you are an experienced trader, there are times when you will look at a chart and ‘feel’ what the market is going to do next. You may think that you are being logical when you do this, but this is exactly the sort of emotional trading that you need to avoid. Unless there is real evidence in the chart that points to some sort of future price movement, all you are doing is playing roulette with your money when you trade this way.
Instead, stick to your trading strategy. For example, if price action is part of your strategy, then make sure that there is clear price action before you trade. Don’t trade because you think you can see price action forming – the human mind is wonderful at recognizing patterns that don’t really exist. Wait until you are certain, and only act then. It is this ability to act on what you really see, rather than what you feel or think you see, that will make you a profitable trader rather than just another amateur.
One of the best ways to enforce discipline around trading and eliminate emotion is to draw up a checklist that you go through before you make each trade. Questions such as “What is my intent with this trade?”, “Does this trade conform to my trading strategy?”, and “Is the setup for this trade real, or am I making it up?” are examples of what should be on the list. Don’t just keep the list in your mind – write it down, and then go through it each time you are thinking of making a trade. If you do this consistently, you will quickly get to the point where asking yourself these questions is second nature – and you will be a better trader because of this.
Finally, remember that even if you do trade completely logically, you are still going to experience losses. This is a fundamental consequence of the way the Forex market works – while signals may increase the probability of future events, they do not guarantee them. Be as logical with your exit strategies as you are when you enter into a trade – make sure that your exit is planned before you ever execute trade – otherwise, you will find yourself making emotional decisions when a trade starts to go wrong.
A Guest Post by FXTM