mind, but also the currency market. In fact, the fluctuations of these two emotions
are the main drivers of the currency market. There are, of course, other emotions
that exist in the market such as disappointment, regret and so on, but fear and greed
are the principal forces that tilt the scales of supply and demand of currencies.
When traders feel overly optimistic about a country or its currency, they become
consumed by the great hope that the currency would appreciate in value against
another currency. They are then guided by this hope and greed to buy the currency
pair now so that they could hopefully sell it at a higher price in the future. Greed
then grows into euphoria, as traders continue to buy and buy, thus taking currency
prices to newer highs. However, since currencies always move in pairs (when one
currency in a pair goes up, the other goes down), fear is also an equally strong
emotion that guides the currency movements. When people are buying a currency
with great hope, they are also selling the other currency in the pair with great fear.
On the other hand, when currency prices go down, fear and greed are also the main
drivers of the move. All in all, fear and greed are behind the steering wheel of the
currency market.
So, while you must learn to recognise these emotions in the market, the problem
comes when you allow them to distort your logic when it comes to making trading
decisions, as most of these decisions will turn out bad, and are likely to cause you
to regret your actions later.
Every trader has emotions of fear and greed; there is no way you can avoid feeling
these emotions, unless you want to adopt the drastic measure of removing your
amygdala – which just happens to be a very important part of a human’s brain.
Since there is no way of banishing these emotions for good, the best thing to do is
to control these emotions, instead of letting them control the way you think and act.
Face and control your fears
Since greed can be categorised as a kind of fear, which is the fear of missing out, I
will discuss the primary types of fears relating to trading, and how they can be
overcome.
The first step to preventing fears from ruining your trading performance is to
recognise the various forms of fear that is connected to trading. And once you
recognise the type of fear you are experiencing, the easier it is for you to handle that
emotional obstacle so that you can trade better. That is the key to emotion-free
trading. It is not about pretending that those fears do not exist, but how you handle
them that matters. Here are some common trading-related fears.
Fear of missing out
Why do so many people rush to departmental store sales, or rushed to buy
technology stocks during the dot-com boom?Any kind of buying mania stems from
a very strong emotion that is commonly invoked in people, and that is the fear of
missing out. This particular fear is also a form of greed because it makes people
salivate at the prospect of a seemingly good opportunity that is “too good to pass
up”.
In trading, this fear manifests itself especially during a sharp rally or decline of a
currency pair. For example, you may see on your screen that EUR/USD is making
new highs, as it keeps going up and up. Your heart begins to pound really fast, and
you have a million thoughts zipping through your brain, with most of the thoughts
urging you to buy now, now, now. You feel the acute pain of not being in the market
as EUR/USD continues to move higher. You think, “Everyone else is buying, and I
haven’t. I am losing out!” This fear of losing out is so strong that it then hypnotises
you into frantically placing buy orders, despite your having some doubts at the far
back of your mind.
The “How can I not be buying (selling) when every one else is buying (selling)”
mindset is extremely dangerous, because your logical thinking faculty becomes
replaced by fear, and when you trade haphazardly, it can result in huge trading
losses. It has even been suggested that the fear of losing out is much stronger than
the fear of losing one’s entire trading account. Traders suffering from this type of
fear are usually the ones who get onto a trend too late.
Be disciplined and hold off that mouse whenever you sense that this type of fear is
creeping up on you. Think instead of all those traders who are pouring dumb money
into the market, and be glad that you know better than them not to join in the craze.
Fear of losses
Trading is a game – there will be winners, and there will be losers. Sometimes you
win some, sometimes you lose some. Losses are bound to happen, no matter how
accurate a trading system may be. Losses can even occur consecutively, especially
under changing market conditions or when you don’t keep your monster emotions
at bay.
The fear of losing is most prominent in new traders as they do not yet have
adequate trading skills and knowledge to help assess and evaluate trading
opportunities with a high level of confidence. This can lead to trading paralysis,
whereby traders become afraid of pulling the trigger when it comes to entering or
exiting trades as they fear losing money or a big portion of their trading capital.
However, if you have a reasonable stop-loss order in place, that is in accordance to
your money management rules, you should have no reason of being fearful of
damaging the trading account based on just one trade. That is what stop-loss orders
are for – to guard against huge losses.
When you do encounter hesitancy in pulling the trigger, evaluate if you have valid
reasons for doing so or if you are simply held back by fear. To overcome the fear
of losing, remember that you have a reasonable stop-loss in place, and that even if
that trade turns out to be an unfortunate loss, you won’t suffer financially or
psychologically. Traders just have to get used to the reality that losses are
inevitable. The trick is to ensure that your losses are kept small so that you do not
harm both your trading account and your state of mind.
Fear of making wrong decisions
Rest assured that “being able to predict the market” is not one of the prerequisites
for being a successful forex trader. No one, and no computer system, can predict
future currency moves with 100% accuracy. Trading is based on probability, not
certainty. If you think that it is highly likely for USD/CHF to go up, you go long,
and if you think there is a high chance for USD/JPY to go down, you short.Atrader
does not have to be right. It does not matter at all whether he or she is right or
wrong; what counts is whether he or she is profitable in the long run.
Traders should not be hung up on the outcome of single trades, or even a few trades,
as trading performance has to be assessed over a period of time. What matters is
that you end up profitable over a period of time. Once you place less emphasis on
being correct on a current trade, your fear of making wrong decisions should abate,
thus enabling you to make better trading decisions without feeling burdened by the
overwhelming pressure to be correct in that trade. Remember that there will be
times of losses and times of profits, which is why it is so important to enter only
trades that have a high probability of success.
Source: 7 Winning Strategies for Trading Forex: Real and Actionable Techniques for Profiting from the Currency Markets
