Your Ultimate Guide to Beating Forex Trading Emotions
You will fail to become a successful trader for two reasons: trading without a strategy and trading your emotions.
On this page, I will share everything I know about controlling your trading emotions, including my best tips on better managing your emotions when trading and beating the psychological challenges of Forex.
I have been trading for over a decade - I have been through all the emotions!
"Becoming a successful Forex trader should be very simple - develop a profitable trading strategy and stick to it. The challenges of trading psychology and a lack of emotional discipline are blamed for blown trading accounts and traders losing money. A profitable trader is an emotionally disciplined trader"
Trading Emotion - the killer of dreams
Many of you reading this have a dream - a dream to become a successful Forex trader!
Unfortunately for you, the road to becoming a successful trader is not easy (but nothing worth achieving in life is!).
On your Forex trading journey, several obstacles - some small, some large - block the way to reaching your journey's end: the land of profitable trading! With time and effort, many of these obstacles are easy to remove. However, one block proves extremely difficult - almost impossible - to move. This is the obstacle of trading emotion and trading psychology!
All traders feel the emotional and psychological challenges of trading. Most of you reading this article are not yet profitable because of your lack of emotional discipline. Your lack of control over your thoughts and feelings.
Whenever I meet with a new student, one of the first questions I ask is, "Why are you currently not profitable in trading?". The answer is usually related to emotion.
Don't get discouraged, though. I am here to help! This page will provide the tips and insights to overcome your trading emotions.
Trading Psychology 101
The psychology involved in trading Forex, or any other financial market, is fascinating. Many of the trading emotions you feel and your psychological challenges are founded on one thing:
Whenever our expectations are not met, it is natural for us to feel disappointed. When similar (or the same) expectations are not continually met, it is natural for that disappointment to grow deeper, developing into discouragement, resentment or frustration. The root of all your blows, discouragements and frustrations is expectation.
Having the wrong expectations about trading can lead to emotional trading. These emotions are usually:
Fear. You expect to lose your profits or to make a bad trade. This fear freezes your ability to act and follow your trading plan.
Greed. You expect to make more from the market or a particular trade. You risk too much or let positions run for too long.
Boredom. You expect more activity and excitement. You don't get it, so you take irrational trades based on boredom and other emotions.
Impatience. You expect trading to be more profitable. You have yet to achieve a double-digit return this month or double your account, so you become impatient and ignore logical risk management.
You may relate to at least one of these emotions. I know I do. It is natural. Don't be too hard on yourself.
It's vital you understand the root of the problem. Why you're being emotional. The heart of the emotional pain is your expectations.
Trading Expectations - the root of all negative emotions
One of the most significant ways to reduce your trading emotions is to change your expectations.
Expectation is the root of your trading psychological challenges. Take some time to think about it; you will realise that all your trading emotions are based on having false or unrealistic expectations.
What do you expect from Forex trading? If your expectations are too high, you will always be emotional in your trading, trying to reach impossible goals and aspirations.
Are you convinced? These examples may help.
A trader expects to double his account each month. Because of this, the trader risks too much. High risk always means high emotion.
A trader expects to have a 90% win rate. Because of this, he becomes emotional when the win rate is not achieved, and he has far more losing trades than expected.
A trader doesn't expect to have consecutive losing traders. Guess what? He has consecutive losing trades and becomes emotional.
A trader expects this month to be profitable. The month is nearly over; he is at a loss and needs to show a profit. He becomes emotional.
Hopefully, these examples are good enough for you to see that at the start of each emotional journey is expectation. Eye-opening?
So, what should be your expectations from Forex trading?
Your win rate will be around 50%.
Making a double-digit return in a month is as good as it gets. Most profitable months will be single-digit.
You will have consecutive losing trades. Sometimes, lots of them. A string of ten losing trades is normal.
You will have lots of losing days and weeks. You will have losing months.
You've had a good year if you gain 20% a year.
Having realistic trading expectations can significantly reduce the challenges of trading emotion and psychology.
"I thought I was a patient man until I had kids! I thought I was a disciplined man until I became a trader! You will learn so much about yourself as you learn to trade. Most of all, you will learn how emotionally weak you are! Weaknesses can become strengths, though - there is hope - you can do this!"
Trading Emotions and Trading Psychology
Let's look at trading emotions in more detail.
Trading emotions can reveal themselves in many ways. Some Forex traders become fearful. Others become stressed or anxious.
Below are the most common psychological challenges in trading.
Fear - this emotion is the most common among traders. It can crystallise itself in many ways:
Fear of losing trades - many traders fear losing trades. They don't want them. They hate it when a stop-loss is triggered, and their account balance shrinks slightly, especially if they are on a losing streak and have had consecutive losing trades already. This fear can lead traders to stop trading and miss profitable trading opportunities. Having losing trades is part of trading, however. It is inevitable. It needs to be embraced and wholly expected.
A common sign of having a fear of losing trades is not taking trades when opportunities present themselves and letting losing positions run into significant losses.
Fear of giving back profits - after having a decent winning trade and showing a healthy profit, some Forex trader are then struck with fear, as they don't want to risk their profits and potentially lose their gain. Some traders think they are being sensible by ring-fencing their earnings, but they have become emotionally attached to their profits and fear losing them. Any trading decision based on emotion - no matter how sensible it may seem - qualifies as emotional trading.
Another example of this fear is not letting positions run long enough. The trader fears losing their current floating P&L, so they close their position early instead of allowing it to run and accumulate greater profits. Not letting winning positions run is a common emotional trait of unsuccessful traders.
Fear of missing out (FOMO) - some traders don't want to miss out on any lucrative trading opportunity, so they take trades based on this fear. They think, "I don't want to miss out on the next bitcoin rally", "I don't want to miss the next potential US Dollar move", or "surely this pair is about to reverse". They take trades based on these thoughts and trade their emotions. Sound familiar?
Greed - being greedy when trading is not as common as being fearful. Most traders who suffer from trading greed usually let their positions run too long, hoping to make even bigger returns. This eventually backfires, though, just like all emotional trading does!
Traders driven by greed also tend to push strategies and time in the market to the max. Instead of being happy with today's returns, they continue to trade to the point that they are over-trading. This often leads to unnecessary losses and trading burnout.
Boredom - too many traders enter the industry with expectations of adrenaline rushes, making large sums of money hourly, always having profitable trades open, always being active in the market, and always having high market volatility. They want excitement, quick returns and a Lamborghini! These false expectations are unsurprising when considering how trading educators and companies market themselves.
Traders struggling with boredom must accept that the most successful traders and reliable trading strategies wait for the right trading opportunities. Many traders get bored of waiting for these opportunities, so they decide to make their own "opportunities"... Guess what? This fails. Why? Because the trades were emotional, not logical and based on a clear trading strategy.
Impatience - impatience can be directly related to boredom. Like all other negative emotions, impatience is based on wrong expectations.
Impatience, especially when dealing with monetary gain, is a crucial component of the psychological and emotional structure of trading. The inability to wait for a decent return is a common characteristic that leads to blown trading accounts and significant losses.
I once watched a clip from a documentary about someone offering members of the public money. The clip went like this:
The host of a famous TV documentary stood in the centre of a busy city
He had a handful of cash
He stopped people randomly and asked them a question...
"Would you rather I give you 100 dollars or 105 dollars?"
Of course, all who were asked replied, "105 dollars"
The TV host then asked a second question...
"Would you rather have 100 dollars right now (showing them the 100 dollars in his hand) or 105 dollars in 30 days?"
Almost all those that were asked replied, "100 dollars now!"
What a thought-provoking experience! If you give it some thought, you'll realise that those being asked were making decisions based on emotion rather than logic. It makes total sense to accept the more extensive offer of 105 Dollars! However, the lack of patience in waiting 30 days (or maybe the fear of not believing that the money would come in 30 days) leads these individuals to choose the most irrational answer. They wanted instant gratification.
Unfortunately, this is why most people fail at trading- they let their emotions dictate their decisions rather than logic and rationale.
"Fear, greed, boredom and impatience... These are the emotional demons that seek to ruin you as a trader"
The Trading Emotions Cycle
Because of trading emotions, becoming a market wizard and beating the market is not easy. Whether you plan on trading stocks, Forex or commodities, you will face emotional and psychological demons.
Watching traders overcome these trading challenges is both inspiring and exciting! Unfortunately, even with the best strategies, many traders cannot overcome their emotions and beat the market. What's worse is that they continually fall into the same emotional mistakes and fail at the same psychological obstacles.
It's true that developing emotional discipline and learning how to manage your trading emotions takes time. However, many traders have had plenty of time and still fall into the same errors. Many traders will let fear, greed, boredom or impatience beat them every time.
Many Forex traders are stuck in an emotional cycle called The Losers Cycle.
The cycle is like this:
Almost all losing traders are in this cycle. They are the strategy hoppers. They are the ones who blame the strategy or the broker for their constant losses and blown trading accounts. They are the traders who fail repeatedly because they constantly become victims of their emotions - they ruin it for themselves!
But guess what? There is hope! These people can change. They can become successful. You can change. You can become successful.
How to Overcome Trading Emotions & Trading Psychology
So far, I have covered the what, why and how of trading psychology and trading emotion. It's now time for the main show! How do we control our Forex trading emotions and - in the process - become successful Forex traders?
Firstly, it is not possible to eliminate trading emotions. They are part of you and will always be around - even after a decade of trading, I still face negative emotions when trading. The key is not to try and eliminate your trading emotions. The key is to reduce the intensity of these emotions and avoid trading emotions where possible.
Tips for Beating Trading Emotions
It may sound corny, but these tips work. They will give you the tools you need to reduce the challenges of trading psychology and be less emotional when trading.
Change your expectations. If you have read this page from the start, this tip should be no surprise. Your expectations from trading will significantly impact your risk management, trading strategy, and overall levels of trading emotions.
If you start trading with the wrong expectations, I guarantee you are going to make things harder for yourself, and your chance of being a trading success will be much lower.
Your expectations should include:
Losing days, weeks, and months
Making regular mistakes
Missing good trading opportunities
Gaining a return of 10 to 30% per year
Having a win rate between 30 to 50%
If these expectations sound unreasonable, you have unrealistic Forex trading expectations.
Correct expectations about Forex are the best way to have a strong and realistic mindset.
Reduce your trading capital. There is an undeniable emotional attachment to money, especially when using money to trade. This emotional attachment intensifies if you are trading with more money than you are comfortable losing or dealing with money you cannot afford to lose.
Why put yourself through so much pain? Reduce your trading capital to feel more comfortable and to make the trading experience more enjoyable. If you are not enjoying trading because it is an emotional drain, then why do it?
If you are unwilling to reduce your trading capital, ask yourself why. You may find that your stubbornness is based on emotion.
Ask yourself, "How would I feel if I lost my trading account today?". You trade with less capital if the answer is emotionally or financially too costly.
The key is to trade with enough to make you take trading seriously, but more is needed to heighten trading emotions.
Reduce your position sizing. Risking too much per trade is another way to crank up those trading emotions.
A single trade should always be viewed as something other than a make or break. That is too much pressure to put on a single trade or a series of trades.
Risking anywhere between 0.1% and 1.0% per trade will keep your account balance healthy, even after several losing trades. 0.3 to 0.5% is my personal risk preference.
Generally, when someone is risking too much per trade, they end up glued to their charts and worried about the outcome of the position. If this is you, then reduce your position sizing.
Reducing your trading capital and position sizing will help reduce stress, make you feel more professional, ease the pressure, and lower the influence of negative trading emotions.
Focus on percentage returns rather than monetary gain. As mentioned already, there is an undeniable emotional attachment to money. Because of this, it's much better to focus on your percentage return or loss than monetary return or loss.
Looking at performance by percentage is much more professional and will help you gauge how much you need to make a decent income through trading.
Being able to state that "I make 40% per year" or "I can double my account each year" is much more meaningful and precise than "I made £10,000 last year". The latter tells nothing. How much did you start with? How much did you end with? Percentages tell a much deeper story than monetary amounts.
Stick with the strategy and don't expect a certain amount of money - too many traders value their success by how much they have made.
Instead of focusing on the money side of trading, focus on your strategy - the thing that gives you an edge!
Your success should be valued in your ability to stick with your trading strategy, not how much money you make (or lose).
Funnily enough, sticking to your strategy will lead to greater monetary returns. So, if you want to make trading work for you, put your energy into following your system rather than the money you are making.
Think longer-term. This is a BIG one.
How often do you check your account balance? How frequently do you review your performance? Most unsuccessful traders check these things daily. "How much money have I made today?" they ask themselves. This mindset is totally wrong and highly unprofessional.
Profitable traders focus on the long term. They are interested in their performance quarterly and yearly - not daily or weekly.
Do yourself a big favour. Ease the pressure on yourself by trying to be profitable this year, not this week!
Initially, focus on making Forex a money-making hobby or second income rather than a full-time rewarding career. Start simple. Start with simple long-term expectations.
Keep busy. Staring at price charts is a waste of time and is an emotional roller coaster. Initially, it might be a novelty, but you will soon realise it increases your trading emotions, especially if you have open positions.
I keep myself very busy throughout the day: running Actual Forex Trading, being a technical analyst for a Forex broker, writing blog posts, playing video games, reading books, watching YouTube, etc. These things keep my mind occupied and distracted from the charts. They also prevent me from reviewing my floating profit and loss from open trades too regularly.
Be committed to your analysis and trading strategies, but let yourself become distracted with other things once trades are open. Give time to the things that give you an edge; don't give your time to emotional activities.
Consider longer-term trading. Day trading is far more emotional than swing trading.
This doesn't mean you shouldn't day trade; it means you make trading harder for yourself.
All new traders should become profitable swing traders before moving into day trading—just my opinion.
Learn from a professional. Here comes the sales pitch.
Learning from someone who knows what they are doing is much more beneficial than trying to teach yourself. You can save yourself a ton of losing trades, heartache, and time by simply learning from a trader who can point you in the right direction. Consider what you have learned in this post and how much you could learn by having your Forex trading coach or mentor.
Another option is to take a course, like my Ultimate Forex Trading Course, which covers my trading strategies and everything you need to become a Forex trader.
Top Trading Psychology Quotes
We all need a bit of motivation from time to time. These quotes on trading psychology will help you.
If you would like to read some books about trading psychology, click here.
Trading Psychology Quote #1
"Trading doesn't just reveal your character, it also builds it if you stay in the game long enough"
Trading Psychology Quote #2
"Money is just something you need in case you do not die tomorrow. Let this be a reminder for you not to obsess over profits and losses. In whatever you do, strive for enjoyment, focus, contentment, humility, openness... Paradoxically (and as an unintended consequence) your trading performance will improve significantly"
Trading Psychology Quote #3
"Trading emotion may result in short-term gains but it will always lead to long-term failure"
Samuel Morton, Actual Forex Trading
Trading Psychology Quote #4
"Trade like you don’t need the money. It takes so much pressure off you"
Download my FREE Trading Psychology PDF...