Making “anger” trades after either having a bad loss or making a bad decision is known to every trader, a beginner and a pro. As soon as emotions get a grip of a trader, useless trades are almost inevitable. Anger and revenge trades are so fatal that can wipe out a forex trading account within minutes. How to identify what triggers trader to emotional trading and what is the way to get out of self-destruction pass immediately with a minimal losses?
Emotional trades in forex happen often and whenever trader looses the control, the account gets wiped out fast. Even with reliable trading strategy, strict discipline and good money management it is easy to become emotional after making bad choices, start increasing size to make it back, moving stops, averaging down, creating excuses to continue trading, look for opportunities that are not even there.
The biggest problem of all is when it comes to crazy trading, you don’t even know you are doing it! So it is up to you to come with a right technique to snap out of it.
Below are tips on how to stop the self-destruction before it actually began:
1. Take a Break
After three consecutive losses the best thing you can do is to quit trading for a day. Some traders even have a “punishment” included in their trading plan: lost a trade, no forex for a week! Market is not going to disappear and tomorrow is another day with million forex opportunities. Instead of anger trades, your best option is to take a breath and give yourself a break.
2. Decrease Size
Make a substantial decrease in size traded. This way you will be able to take your mind off serious trading for a while and become sane again. Give yourself time and go back to appropriate size trading only when you are truly ready.
3. Add Money You Didn’t Win
Consider putting the amount equal to the winning trade you didn’t take in your forex account. To see the money in the account will make you feel better and think rationally again.
4. Add Amount You Lost
If you lost a trade, you might want to add the amount you have lost back to the account. It is surprising how easy it is to become normal again when you don’t see your account with losses.
5. Use Visual Effects!
Make a poster or a note which will help you to remember not to make irrational decisions after bad trades. The note will help you to stay rational, take only the trades that you fully understand and pass on all the rest.
6. Trade With Reason
Psychology is one of the most important factors influencing success or failure in forex trading. Make sure that you have right psychological reasons to enter a trade.
7. Be Military Precise
Be disciplined. In fact, be army disciplined! It is important to enter the forex market only when all your criteria are met. This way emotion has nothing to do with your decision to enter a trade.
8. Confess and Talk It All Out
Confess about your losses to someone nearby or even over the net, a fellow trader or someone who can understand your pain. Talking helps to free your mind from the negative thoughts about loss and bring you back to reality and objectivity.
As a beginner in forex trading you might wonder which analysis suits you best – technical or fundamental. Is it better to concentrate on one of them, or rather combine the two for better understanding? What do other traders use to analyze price movements?
Technical analysis uses forex market data, such as prices, volume, etc., together with technical indicators, such as relative strength index, moving averages, Fibonacci, etc., to decide the trading positions and forecast future price movements.
Technical analysis is based on:
1. examination of chart formations
2. differentiation of trends
3. identification of buying and selling prospects
4. analyzing highest and lowest price of a currency
5. understanding of opening/closing prices and volume of transactions
Depending on the trading style, forex trader can use technical analysis on a daily basis (5 minute, 15 minute, hourly), weekly or monthly basis.
Technical analysis uses the assumption that all market information and possible currency volatility can be obtained from the price chain. Forex trader who uses technical analysis believes in three fundamental assumptions – the market moves according to all factors, the price movement is purposeful and connected to these events, the history tends to repeat itself over and over again. In other words a trader looks back at what has already happened and makes decisions based on the believe that volatility will generally have the same pattern of the past.
Fundamental analysis uses financial news and economic news, such earnings and consumer reports, economic data releases, interest rates updates etc., together with non financial information, such as political news, weather broadcasts to determine the trades.
Fundamental analysis involves the analysis of current political and economical situation in the country of the selected currency. Generally, the country’s economy relies on the following factors:
1. Central Bank’s interest rates
2. National unemployment data
3. Tax policy
4. Inflation rate
5. Political unrest or transition
Forex trader who uses fundamental analysis studies the external factors which may affect the supply and demand of the market. Fundamental analysis in forex assumes that the market is unpredictable and the information can’t be immediately obtained; the currency prices are inconsistent and will change according to the future economic conditions.
So which analysis is more vital? Can a trader use only one in order to succeed or it is important to combine the two together?
The answer is simple – don’t limit yourself to one kind. Fundamental and technical analysis complete one another and both are vital for successful forex trading.
Forex trading involves analyzing and predicting. Whenever you enter a trade you should have a slight idea of where the price is going before reversing. According to this guess, you are able to set a profit target for each trade. Forex traders set daily and weekly targets based on the experience. Why is it important to know the target? Does setting a target limit the maximum profit possibilities? Is knowing your target necessary for the success?
The reason to set targets is to be able to close a trade (either automatically or manually) whenever the predicted profit target is reached. Some traders may feel that setting a target limits the possibility of a maximum profit. In order to avoid the greed taking over your senses, it might be better to set slightly longer term targets, let’s say weekly.
Experienced traders don’t just wake up in the morning and say, let’s make 25 pips today and that’s it. Setting a target should not be based on thin air. The prediction should be derived from your trading system, which includes lots of parameters and overall past experience. Every day the market is full of surprises. In order to give a optimal estimate of the target, a forex trader should evaluate the situation and decide whether to let a trade run longer or not.
Consider target as a monitoring tool of your success; however do not get caught up in making a specific amount of cash per week or month. It is important to monitor your trading performance, and in case the numbers fall under the red line, you will know that something needs to be fixed.
The problem with setting daily targets is high expectation, eagerness to trade and a possibility of overtrading in order to achieve the goal. A trader might consider taking marginal setups rather than waiting patiently for a profitable trade. After all, quality is what matters, not quantity.
Long term targets (such as quarter or annual) might be much more useful for a forex trader. This way the weekly and monthly target ranges can be integrated to ensure the longer period targets. Besides, keep in mind that even very good strategies can have bad months, let alone weeks and days! Without considering all the factors, you contribute to the increase of a failure rate.
Setting profit targets depend on the trading style and strategy a forex trader uses. Some traders prefer not to use profit targets at all, because it goes against the all-known rule “cut your losses short, let your profits run.” By using the targets, a trader may take the profit and watch the market continue on. These traders develop a very strong discipline which involves letting the winning trades run with a trailing stop. This increases the chance to maximize good trades and not miss a good ride.
Despite all, profit targets are useful to many forex traders. Since the market is full of opportunities, it might not be such a bad idea to snatch the profit when it is right under your nose, rather than taking a risk of losing not only the possible profit, but all other funds in the account!
Last, but not least, what can be used to determine possible profit targets? Here are some of ideas:
1. Use trend lines, fibo expansion tool, previous highs and lows values
2. Measure method that is used with chart (price) pattern
3. Improve with experience! With knowledge comes great understanding of a market and possible outcomes. Be patient, learn and practice.
Forex trading is risky; however with the right money management, risk management and discipline you can reduce the risk to the minimum. If forex is done wisely, you can spot tones of profitable opportunities.
