The Effect of emotions on your Forex Trading

Table of contents:

1 The key to successful trading

If you have already traded Forex or CFDs with real money in a live account, you will know what is meant by the fact that emotions in Forex trading do more harm than good.

The key to successful trading

The key to making money successfully with Forex trading is to avoid emotional decisions and to stick strictly to your previously thought-out strategy. Relying on your gut feeling is certainly the wrong way to become a successful Forex trader. Those who rely only on their gut feeling will always lose money in the long run. Forex trading is a highly volatile market in which, logically enough, emotions also arise. And exactly these emotions can influence your trading decisions. Unless you have a fixed Forex trading strategy in mind and stick strictly to that strategy, no matter what your gut feeling is. The key to success in Forex trading is a system, market analysis, and perseverance. You should also read our 25 Rules for More Success in Forex Trading to achieve even better results when trading Forex and CFDs.

Trading System

Almost all experienced traders advise trading beginners to develop a system and stick to it, no matter what. Letting emotions influence your trading decisions can negatively affect your trading success in several ways. Your system tells you what to buy, when to buy it and when to sell it. By following the system you will maximize your profits and minimize your losses.

Systems based on technical analysis and historical market trends always have the greatest potential, especially if you are just starting out in Forex trading. However, many experienced traders with years of experience continue to use this combination to maximize their profits.

Basically, the following applies:

If your gut feeling and your system have different opinions, the system is almost always right!

Using a system takes the emotion out of your trading and eliminates the main reason why many traders fail, because your system does not care about emotions. It always stays on a fixed course. In order to be successful, your system should always – regardless of whether you developed it yourself or copied a strategy already developed by someone else – set the entry and exit points of the trade.

Under what conditions should I buy?

For example, you place a buy order when the price falls more than 10 pips because your analysis tells you that this is most likely the low point.

When should I sell again?

There are 2 reasons to close the trade – to maximize profit or minimize loss. This means you must place a Stop Loss Order and a Take Profit Order on every trade. Use your system to set these points at the price markers at which your price target or loss limit is reached.

When can I question my decision?

Although the Forex market moves mostly in predictable patterns, there are always variations in the trend within these patterns. Being aware of these variations makes it much easier to decide whether your previous decision still makes sense, or whether it is just wishful thinking. In this case you run the risk of bringing emotions into the trade and thus spoil your business.

When do I close a trade ?

In the simplest case, your strategy may consist of, for example, a stop-loss in case of a 5% loss and a take-profit in case of a 25% profit. Another key to success is persistence. If you analyze the trends in the market, you will find that during trend phases the market moves more or less within predictable patterns. Almost no trend follows a clear upward or downward phase. There are always market phases in which the price breaks out of the current trend for some time. And exactly in these phases emotions can damage your account balance. For example, if you have an open buy position in a currency pair and the price suddenly drops, it is naturally tempting to panic and close the position even though your system tells you to hold it. On the other hand, it is logically tempting not to close a position that has developed as predicted and hope for even higher profits, even though your system tells you to close the position now. In these moments you have to stick strictly to your system and completely banish emotions like fear or greed from your trading decisions. Your system tells you when to open a trade and when to close it in order to maximize your profit or minimize your loss. What your gut says in these moments does not matter.

If you control your emotions and stick strictly to your system, you will most likely succeed in trading Forex and other markets.

All you need now is a good Forex broker who will execute your orders the way you want. For a list of all Forex brokers with trader ratings, please see our Forex Broker Comparison.

Read my other articles about Forex Trading:

Effect Of Emotions On Your Forex Trading