Humans are emotional beings. Emotions help us get out of trouble if we perceive a threat or make succeeding easier when we feel motivated. Having said so if we do not keep emotions in check, it can make things worse. Breeding panic or complacency, the situation can quickly go south. This is the same for forex trading.
In this article, we will examine 3 ways how emotional forex trading can be a recipe for disaster. Among the readers that wrote to us about their failure / margin calls, many can be attributed to excessive emotions. It is important that we strive to be aware and hence in control of our state of emotion. Forex trading need not end up with a margin call when done in a planned risk managed manner.
Cutting Losses Too Quickly
Did you ever see a trading position go red and feel a dire sense of dread to close it? The fear of losing out can make panic prevail over logic. This will lead to unnecessary losses as the positions may turn out to be profitable.
We know that the forex market never goes in a straight line. Therefore it is important to have a forex trading plan with a stop loss and take profit target that has proper risk management. If you are only risking 2% of your account balance versus 20%, you are less likely to panic and hence more likely to see your forex positions develop to their full potential.
Taking Profits Too Quickly
Have a trading position in the green? When was the last time you felt that it would turn against you and hence you convinced yourself that you should be contented and pocket that profit. While we cannot rule out the possibility that the forex position may slip back into red, there is also a possibility that it will move further in your favor. This will impact the health of your forex account as you end up with very meager trades. If you are also cutting your losses too quickly, the problem is made worse.
We fall back to the same time tested deterrent of emotional trading. A well thought forex trading plan with proper money management should help you trade less emotionally.
Trading Too Frequently
Are you having this urge to be constantly trading? For example, now that your position has hit stop loss, should you enter an opposite trade immediately so that you can recover your losses? Perhaps your position met the profit target so wouldn’t it be a wasted opportunity if you do not quickly enter into a forex position to further ride the momentum.
If you can picture yourself doing the above, your forex trading is probably too excessive due to the fear of missing out. Price action is never a straight line. There is no guarantee that the momentum will continue in it’s current direction and you may be chasing up a blind alley. Upon the closure of a forex position, regardless of whether it is a losing or winning trade, take a step back and evaluation the current situation. Determine if there is a fundamental, sentimental and technical basis for you to trade again. Often, you may find it wiser to wait for a pullback or further validation.
The Bottom Line
Emotions do not play along well with financial trading. It has the potential to increase your losses, limit your winnings or even wipe out your money. In fact, if you find yourself in all 3 of the emotional situations described above, the possibility of a margin call eventually is very real.
Proceed to our forex education section to learn more and follow our regular forecasts (join our mailing list and get a free ebook). You can also sign up for our premium analysis which is focused on helping you incorporate logic rather than emotions when trading in forex. You will also learn forex trading as a skill instead of just merely following signals.