A Guest Post by FXTM
While forex trading requires strong market insights and analytical skills, perhaps the single most important ingredient of successful forex trading is the ability to manage emotions. Emotional decisions in forex trading are usually not the best decisions, as they are motivated by fear or greed rather than common sense. However, while many Forex advisors will stress the need to control emotions, very few provide practical advice on how to do this.
There is probably a very good reason for this. While you can compensate for emotion and avoid its negative effects, there is no way to actually suppress emotion completely. This is because of the way that our brains are structured. While we like to think that our brains are completely logical, in fact it is only the most modern parts of our brains – the parts that evolved most recently – that allow us to carry out complex reasoning. The frontal lobes are where we think about things rationally, but these are only an overlay on more ancient, emotional parts of our brains – where emotions such as fear exist. When we sense danger, they kick into high gear with a fight or flight response, whether we want them to or not. There were good reasons for this in the past – and there still are to some extent today – but these uncontrollable emotions can spell disaster when trading.
In this is why it is important to make as many trading decisions as you can when you are not in an emotional state. This is when you are not actually trading and don’t have your hard earned money on the line. In other words, successful traders plan out their trades before they ever open a position, working through all the various scenarios and putting contingency plans in place to deal with them. When they actually start trading, they are following a predetermined path with very few decisions that need to be made during the trade. They need the discipline to stick to the plan, but they don’t end up making decisions that are clouded by emotion. They don’t spend time watching their trades unfold, and they don’t try to second-guess themselves by analyzing huge amounts of new market data as their position unfolds.
The other key thing to consider when trying to minimize the effect of emotion is your trading strategy. In general, complex trading strategies with many indicators make trades much more difficult to plan upfront, and they also create frustration and confusion while trading. As a result, traders end up making many more emotional decisions with complex strategies, leading to losses. On the other hand, simple trading strategies are easier to plan out in advance, and they make it much easier to put the strategy on autopilot once the trade is made. While some traders pursue that extra edge by using complex strategies, in most cases any benefits are far outweighed by the poor decisions that come with emotional trading.