Managing the Emotional Side of Trading
Churchill, the British Prime Minister during WWII, is famous for saying, “Never give up. Never give up. Never give up.”
While he spoke specifically to the British as they faced the terrible nightmare of the Nazi invasion and conquering of the rest of Europe, they apply just as aptly to Forex traders today.
However good our system, it will sometimes not work and we’ll give money back. This is normal and successful traders both understand and accept this truth. They don’t worry about individual trade outcomes (wins or losses), they worry about what happens to their account over the long haul, and they focus on whether or not the market has changed enough that they need to adapt their system to the new market reality.
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New traders often struggle to keep going when they lose money. Or they struggle to keep trusting and following their system when they give money back. The truth is that if you’re not giving money back, you’re not trading, and you won’t be in the position that really takes off, wipes out all the losses and delivers you a big profit.
Trade outcomes don’t make or break you as long as you keep your losses short and have the ability to let your profits run. It’s human nature to have emotional responses to success or failure. Worse, it’s human nature to base our own sense of self-worth on our success or failures. Think about it. Do you feel confident when things seem to be working out for you, but lose that confidence when things seem to get in the way of your success?
Because Forex trading is usually short-term, it’s possible to feel both good and bad about yourself many times a day…if you let your emotional response to your individual trade outcomes affect your mood or sense of self. So the first thing to work on as a trader is to not let your emotional response to any individual trade affect your actions when the next opportunity arrives.
Below is a chart of the 15-minute EUR/USD currency pair. Assume that the trading system is simply this: Get in on a trade when the 14-period EMA changes direction because of a price action breakout.
This chart is neatly divided into sections (1) and (2). Section (1) is bearish, section (2) is bullish.
First, look at section (1). Inexperienced or uneducated traders often fall into the trap of getting into the trade as directed by their system but missing out on any future possible trades if they end up losing money on the initial trade.
They say that no man is an island…but every trade should be. Whatever the outcome of any individual trade, forget it immediately and keep yourself open to the next opportunity focused more on executing your system than the recent memory of any profit or loss.