Given that the forex market sees more than $5 trillion traded globally every single day, you may be tempted to dabble in the foreign exchange as a novice investor. This market remains the most volatile entity of its type in the world, however, and considerable challenges must be overcome to become a successful trader.
One of these revolves around the impact of emotions on forex trading, with feelings of fear, anxiety, and excitement particularly influential on inexperienced investors who lack a viable strategy.
In the article below, we’ll consider the psychological complications associated with forex trading, whilst appraising the steps that you can take to manage your emotions and invest your capital based solely on knowledge and insights.
1. Create a Personal Set of Rules
When starting out or looking to follow up an initially successful trade, you may find yourself getting quite excited as an investor.
This can be extremely problematic, as this emotion can quickly overtake you whilst clouding your judgment when implementing future trades.
To negate this, you should consider establishing an unwavering set of personal rules that govern your trading decisions, including those that pertain to volume, stop-loss limits and market exposure.
These rules create a formal set of guidelines and principles that guide your decision making, helping you to keep your emotions in check and prevent adrenalin from triggering rash judgments.
2. Trade the Right Market Conditions
These rules should form the basis of your trading strategy, but it’s crucial that you the right market conditions according to your philosophy and appetite for risk as an investor.
After all, the rules that you’ve set may be incompatible with trading conditions in some markets, and this can cause you to operate in a sub-optimal environment that minimizes profit and even incurs losses in the worst case scenario.
To avoid this, you should test your rules and basic strategy in simulated but real-time market conditions, by using the demo account feature at Oanda.
This way, you can identify which conditions suit your rules and enable you to execute more profitable trades over time.
3. Minimize your Trade Size
Perhaps the easiest way of decreasing the emotional impact of investment is to lower your total trade size.
The reason for this is simple; as arbitrarily optimizing the size of your forex trade may rapidly exhaust your useable margin as the trade moves against the investor. This means that the position may ultimately be closed as a so-called “margin call”, which incurs a loss and provides no room for error.
This can cause significant stress and anxiety in traders, so by taking preventative steps to stop this occurrence, you’re effectively removing emotion as a factor and simultaneously making the most of your capital.
So, develop an approach that minimizes your trade size and lowers the leverage of your investments, in order to diminish your risk and take the feelings out of your subsequent decisions.