If you’re still reading this far, I commend you. And I also apologize if the first few lessons are boring. Do not worry, there are more boring lessons to come… Its important to go thru the basics as it will be the foundation of your forex trading.
There was once a great trader I read in a book that said (I forgot the title of the book), “Trading is 60% money management, 30% psychology and 10% trading system”. But before we go thru money management, I want to talk to you about psychology because I think, how you manage your money in a trade relates to how good your psyche is during a trade. An angry trader that suffered losses will have a pretty shitty management to win back the lost money and so is a happy manager that wins and became over confident. Its one big part of your trading.
How A Successful Trader Think About Trading
I think, the successful trader is someone who is willing to lose. Who lets go of trying to be in control and think that the market is something that you can not analyze or predict. Think of it as a game of probabilities. There are patterns that comes out every now and then, but ultimately, it doesn’t guarantee a win or a loss 100% of the time.
Think of it as a game
The default chance of a person winning this game is 50% – 50%. That alone is big chance to win compared to casino, lottery and sweepstakes. But as you know, you can increase this chance. It can be 60% – 40%, 70% – 30%. It all depends on how good are you in recognizing patterns and how disciplined you are in implementing your plan.
The thing is, you can also decrease your chances. Emotions, greed and fear decrease this chance. I hope by now, you have probably experienced a winning streak. Thru this experience, you might have thought, “Wow, this is easy. I know where this trend will go next and I’m going to bet double this time because I’m sure of it. I have never been wrong.” And then comes the time where the probabilities hit. You lost all the profit you have won. You’re back to zero profit. Feeling angered by the loss of something you do not own, you try to fight back and bet more. This is where people get bankrupt in forex trading. They let emotions get the best of them. Once the good feeling of winning is there, its easy to get lost in the process and greed sets in.
How to control emotions
I think “control” is a bad term. Especially in forex trading. I would rather call it “master”. How to “master” greed and fear in forex trading. The thing is, demo trading has its purpose, it gives us a false sense of security thinking that our system works and that it is profitable. But the truth is, once you trade live, the real enemy here is yourself. Many beginning forex traders are profitable demo trading but loses their money when going live. Its not a coincidence that this happens a lot of times. Betting your own money to make more money and risking in with a margin, its the ultimate adrenaline rush for gamblers.
I will give you some pointers on how to master you emotions. These helped me become a better trader and hopefully be beneficial to you as well:
- Meet Mr. Market. Close your eyes and imagine the market as a person. Warren Buffett / Ben Graham coined him Mr. Market. Its helpful to visualize the market as a person. The reason is, it cements the idea that you can not control a person. Mr. Market has his own emotional instability kind of like a girl in her period. Kind of like a person in a high position like the President of the Philippines. You can not control him, but he’s the only one to do business with. So you need to be patient with his emotional volatility. In the end, he is still the one who will make you rich.
- Take action or not. Now that you have a clear picture of Mr. Market, what are you to do to make money? You can buy and sell. But actually, you have 3 choices… You can buy, sell AND do nothing. And that’s the next point…
- Have patience. If your trading system said, “Mr. Market is acting mental again. I have to wait for him to calm down.” then do it. Be patient. Wait for the perfect time what ever is the perfect time according to your trading system (lessons about trading systems coming soon). Do nothing, go outside, get a hobby, past time. Wait for the perfect moment. Eventhough you missed an opportunity for slacking around longer than necessary, always remember that:
- The market will always be there tomorrow. And probably more years to come even after you’re dead. There will always be more opportunities in the future. Don’t beat yourself for missing an opportunity. Don’t be eager to jump into a potential opportunity. Always remember the market will always be there.
Why Am I Teaching You This?
I can altogether skip this lesson and you can still trade. Actually, you can skip this lesson. But one thing stopping me from teaching you how to master your emotion for trading and especially having the right psychology in trading. That reason is stress.
Forex trading is stressful if there is emotion involved. There are a lot of traders that suffered depression, addiction to drugs and alcohol and impotence (this is probably the scariest) because of the stress that trading bring. I don’t want you be a victim. Forex trading should enhance your life, not be your life.
The assignment for today is simple. You can do this demo trading or for the full effect, open a live account with minimum capital. Just so you can trade with real money. You can see our forex broker’s list for a list of brokers you can sign up with.
Now, once you have an account, pay attention to how you trade. What you feel when you open a trade. Do you feel excited? Angry? Afraid? Write it down in a piece of paper. Do this together with practicing trading.
The idea is, if you feel any emotions while trading, opening and closing trades. Then you’re doing it wrong. You should feel indifferent. Bored even when you trade. That’s the feeling you want to achieve. The feeling of earning 1000 pips and still bored. The feeling of losing 2000 pips and still bored. Of course, with money management, you won’t allow this kind of loss. More on that on our next lesson…
PREV: Lesson 3: Forex Trading Platform – Basic Trading 101