Managing the Mental Side of Forex

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Managing your trading mind set
Managing your trading mind set © forexop

Staying mentally focused while you build confidence in your trading strategy is one of the most difficult skills for new forex traders. Even the best trading systems lose money unless they are executed mechanically and without emotion.

Preparation – don’t take your troubles and worries to your desk – make sure you have a clear head.
Don’t be over eager – look for reasons not to trade.
Stick to a strategy – never be tempted to overreact and move your stop-losses unless it’s part of your overall plan.
Have realistic expectations – Look for consistent, steady returns rather than chasing those elusive “one off” big wins.
Take a break – if in doubt, stay out.

Unfortunately, it’s scary to see real dollars and cents changing with every move of the market, and emotions can cause a trader to jump into a bad trade or out of a good one before the system says they should. Despite the stress, there are some things you do to try to stay focused and execute your trading plan to perfection.

It’s scary to see real dollars and cents changing with every move of the market.

1) Be Prepared: Do you remember going to driving school and having the instructor tell you not to drive when you’re stressed, angry, upset, tired or otherwise emotional? Forex is the same, except this time you actually need to listen to the advice. When you sit down to trade, be well rested, focused and prepared to work. If you’re not, you’ll pay for your mistake, literally.

2) Find a Reason Not To Trade: If you find yourself getting over-eager and jumping into trades too early, start looking for reasons not to trade. Find the indicator saying the opposite of the rest. This is particularly useful when you’re jumping before you have that confirming indicator. When in doubt, stay out – train yourself to find reasons not to trade.

3) Don’t Move Your Targets or Stop Losses: Never move targets or stop losses, unless it is a pre-planned part of the trade. Moving your stop loss down isn’t allowing the market to come back, it’s allowing the market to take more of your money.

If you find yourself struggling to stay in trades, examine where you’re placing your targets and stops and make sure they are wide enough. Believe in the plan, and you won’t need to move your stops and targets while the trade is open.

4) Have Reasonable Expectations: Reasonable expectations are the key to long-term forex success. If you’re expecting to make ten times your initial investment in the first week, then you’ll be sadly disappointed.

When using leverage of 1:50, a negative real return of just 2% is enough to wipe out your entire account.

A realistic rate of return is about 15% a year. That means if you invest $1000, you should aim to make $150 and finish the year with $1150.

While there are strategies that could give much higher returns, they are considerably more risky and require high leverage – the top traders on eToro for example typically show annualized returns of up to 300%. Keep in mind however that when using leverage of 1:50, a negative real return of just 2% is enough to wipe out your entire capital.

Have reasonable expectations for the number of trades as well. If your trading system has you in and out of the market every couple of minutes, you need to refine it (trade “churning” is more likely to make your broker rich rather than you).

As well as causing unnecessary stress and increasing fees, “over traders” statistically have returns that are well below average. Some of the best trading systems only trade once or twice a week. Remember, look for quality not quantity.

5) Walk Away From The Screen: If things get too intense, take a break. Take a walk around the block, grab some chips or watch some TV. Do anything to take your mind off trading. If you’re particularly struggling, walk away and come back tomorrow.

Every trader has their winners and losers, so stick with the plan and don’t overreact or start chasing the market, because your emotions will take over and you’ll lose money.

These mental tricks will help you become a more disciplined trader. Discipline and careful execution are the keys to winning with forex (see more) , so make sure you are able to walk away if you get too stressed. Don’t pile on the pressure when you can’t head straight for an Aston Martin dealership after your first day in the market.

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About the Author

Steve Connell has spent over 17 years working in the finance sector as a trader/market maker and strategist. Over that time he’s worked for several global banks and hedge funds. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures.

1 Comment
  1. Of course. “If you’re not, you’ll pay for your mistake, literally.” I just did 🙁 I’m a novice. I did an astonishing 250% on that “one off” big wins, and then tired and in distress. Lost it all in two movements.

    Thanks for the very good job put on here.

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