- Why Trading Psychology Is Key To Making Money As a Forex Trader
By Your Trading Coach
Trading Angel
NO ONE IS WORRIED THEY WON’T HAVE THE RIGHT PSYCHOLOGY WHEN THEY START TRADING
Most forex traders begin their forex journey looking to make some more money. Either they want to be able to quit their full time job entirely and begin trading for a living or they have a lot of surplus cash sitting around which they’d prefer to do something with to grow it rather than leaving it in a bank account to depreciate through inflation. As a forex trading coach, when people come to me, looking for guidance in learning to trade the financial markets, they come with an expectation that trading is difficult. I’m often asked, if I honestly believe anyone can learn to trade or if it’s worth learning if you’re not good at maths, how long it takes to understand chart patterns etc It doesn’t seem like it’s much of a secret to the wider world that forex trading isn’t easy. However, interestingly, the real thing which makes forex trading so difficult to master doesn’t seem to be the thing people think it is. As I mentioned before, people ask me often if they need to be good at maths to be a successful forex trader (my answer is ‘no’ and I’ve actually written a whole other blog post on this topic) there are two things which will determine if you are good trader or not, one of them is; putting in the practice. The other is psychology. If I could add a third, it would be risk management. To be honest there are a few things which determine if you are going to be successful as a trader or not but this blog post is about trading psychology, which is high on the list. So let’s get into it.
EVERYONE IS CONFIDENT WHEN THEY DON’T KNOW THE DANGERS
Ever wondered why everyone makes money trading a demo account and then as soon as they switch to live trading they lose it all? Or why every new trader seems to have some bizarre form of beginners luck? Ever noticed how the most ridiculously basic trading strategies can work well for a certain period of time? The common denominator here is that trading psychology in all these circumstances is peaceful and blissfully unaware of the real dangers lurking around the corner. As a trading mentor, I will tell you that if you lose your first trade you are lucky. This keeps you humble enough to proceed with caution. Winning your first trade and thinking forex trading is easy is a trap which will blow your trading account.
WHEN TRADING IS LIKE A HORROR MOVIE
Once traders go through their first harrowing experience of a margin call or a blown account or even a gigantic loss, how do they manage to continue with good psychology? It’s not easy. What often happens after one of these events is a series of downward spiral trading catastrophes such as FOMO (fear of missing out) trading or revenge trading. FOMO trading is when you are scared of missing an opportunity in the market and are worried if you don’t get into a trade quickly there won’t be other good trading opportunities. This often leads to losses. Revenge trading is when you feel angry that you have lost money in the market and make impulsive trades to attempt to quickly make back any money you have lost. Often traders increase their lot sizes as well in a desperate attempt to make more money more quickly. When any of these types of trading start to occur, traders are in a bad place mentally and are not experiencing good trading psychology. It is clear, they have not mastered their mindset and they have not mastered the financial markets either!
While we are on the subject of bad trading, an old favourite of mine from my early trading days was the fact I would often get really frustrated by small fluctuations in price and if the market went against me I would panic and close my trade at a loss only to watch it then reverse and go back in the direction I had actually placed the trade in the first place. Meaning I had got the direction right and I had still lost money on the trade. I seemed to have an uncanny ability to control the market. The second I placed a trade or came out of a trade it seemed to almost immediately go in the opposite direction.
HOW DO YOU STAY CALM WHEN YOU KNOW THERE IS DANGER?
So now we’ve established that trading is terrifying at times and not reacting to that terror is the key to success, how do we actually master our trading psychology?
Here are my top tips for staying sane when trading forex
- Manage your own margin and keep it at 80%
- Lot sizes start small and are scaled up slowly
- Don’t have too many open trades at once
- Focus on the potential loss rather then the win
- Say goodbye to your maximum loss before you place the trade
- Leave hedging to the professionals
- Always know why you got into the trade in the first place
- Be prepared to take a break when things get too bad or good
- Don’t trade when you wouldn’t drive a car
- Mediation is helpful for managing emotions
Let’s break these down
MANAGE YOUR OWN MARGIN AND KEEP IT AT 80%
Most traders when they first start trading forex think that the money they have in their trading account is the money that’s available for them to trade with. Technically this is true, however its not great for your trading psychology. This mentality allows you to take big risks and trade with high lots sizes. It allows you the power to blow your entire account on one trade. If you divide your trading account up into 80% and 20% it’s a lot better for your trading psychology not to mention your risk management. 80% of you account is protected at all times and never gets touched, you guard this money with your life. That means when you’re on a £1000 account you never ever ever let your account balance drop below £800 and once you’ve scaled up, to say, a £10,000 account you never ever ever let you account balance drop below £8,000. So you are only trading with 20% of your account. I bet your feel so much happier about life and trading in general just by reading those words and thinking about how peaceful trading will be when 80% of your account is protected at all times. If you ever go over your 20% allowance I would always say stop trading immediately and book in a session with your trading mentor so you can identify what went wrong and what needs to change moving forward. If you need a trading mentor go to www.tradingangel.co.uk to get added to our waitlist.
LOT SIZES SHOULD START SMALL AND BE SCALED UP SLOWLY
Now you know you’re only going to be trading with 20% of your account at any one time you probably have immediately started reconsidering those enormous lots sizes you’ve been placing. Getting the right lot size for your account is a bit of an art. It needs to be big enough that you stay focused and learn from it, but it cannot be too big that you close your trades early because the fluctuations scare you – my old favourite game with the market. When you increase your lot sizes, you want to do this slowly, as no matter how long you’ve been trading for, it’s always a shock to the system when you see the numbers take an enormous leap in either direction. On the whole it’s recommended to never risk more than 2% of your total account balance on any one trade. Often traders actually prefer to keep this number smaller, opting for 1% or even 0.5%. There are apps which can help you to figure out how much you are risking but an easy way to do this is to type you account size into a calculator and then multiply by 0.02 (for 2%) so for example if your account was at £10,346 then this number multiplied by 0.02 is £206.92 – therefore this is the most you are allowed to risk on any one trade. And if you want to know what lot size that means you can use, there are handy little tools called pip calculators, I use one at forextime.com, it’s free and easy to use and tells you the pip value of each forex currency pair.
DON’T HAVE TOO MANY OPEN TRADES AT ONCE
This might not apply to everyone but personally if I have more than five open trades at once I find it a bit overwhelming, especially if they are all taking a while to come into profit. Sometimes it can feel a lot calmer on your mind and better for your trading psychology to be a bit more selective about which trades you chose to open. As you get more experience this will be less of an issue but definitely in your first few years, it can help to keep open trades to a minimum. This also means you’re less likely to have a margin call or go over your own personal margin limit if they all close suddenly at a loss.
FOCUS ON THE POTENTIAL LOSS RATHER THAN THE WIN
When most traders open a trade they are excited about the potential money they could win. Usually they open trades with optimism and think about the take profit more than the stop loss. But actually turning this around in your head can be really beneficial for your trading psychology. Rather than thinking about the money you’re going to win if the trade hits take profit, focus on the maximum loss. First of all, this is helpful for your risk management, if you acknowledge the fact that trading is risky and you could lose a trade you’re more likely to be sensible with your stop loss and lot size. But also it allows you the chance to decide if you think the maximum loss is worth the risk of taking the trade in the first place. It’s possible that after figuring out where your stop loss needs to go, based on volatility, for example, that you don’t think the trade set up is actually worth the potential pip loss.
SAY GOODBYE TO YOUR MAXIMUM LOSS BEFORE YOU PLACE THE TRADE
If you have done the calculations and figured out exactly where your stop loss needs to go and what your lot size is going to be and therefore how much you will lose if your trade hits stop loss, I want you to take a moment to say goodbye to your maximum loss before you place your trade. Think of it as the money you are risking to be in the game. This is going to be so good for your psychology when the trade is open. If you have already accepted the maximum loss and acknowledged its a possibility you take it, then you are going to be a lot calmer when the trade is open and less likely to close it on a whim if you start seeing volatility in the market.
LEAVE HEDGING TO THE PROFESSIONALS
Hedging is what professional traders do to maximise their chances of winning. That’s where the expression ‘hedging your bets’ comes from. It’s when you open trades in both directions. I really really really don’t recommend doing this unless you are a professional. Any time I’ve ever done this I’ve felt overwhelmed and confused and not sure I actually win at all in any outcome. If you are ever in a situation when you are feeling overwhelmed by open trades it can be helpful to have a trader mentor who you can message and ask for a bit of clarity on the trades which yu have placed and how best to manage them.
ALWAYS KNOW WHY YOU GOT INTO THE TRADE IN THE FIRST PLACE
Following a clear set of rules and having a strategy in place is really important for your trading psychology. If you’re not sure why you got into the trade in the first place, it’s difficult to justify staying in it if the trade starts to move in the opposite direction. If you put in the work and followed your strategy exactly, then you won’t be thrown off by price fluctuations and you’ll be able to keep your cool when the trade is open. If you need some strategies to follow then there are three step by step strategies as part of Trading Angel Academy, each comes with a downloadable set of rules to follow and checklists to make it easy for newer traders to follow. Academy members also get priority to live trading sessions by your trading mentor. You can sign up to Trading Angel Academy using this link:
BE PREPARED TO TAKE A BREAK WHEN THINGS GET TOO BAD OR GOOD
We’re often told to take a break if we have a big loss in trading, but not many people remind us to take a break if we have a big win as well. The reason we take a break after a big loss is to avoid falling down the rabbit hole of doom which is revenge trading. But the reason we might want to take a break after we’ve had a big win is the less frequently mentioned ‘invincible trader syndrome’. I just made that up, which is why it’s less frequently mentioned. But it’s a thing, so start talking about it and telling everyone you read it here first. Invincible trader syndrome is when a trader feels invincible. If you can remember the beginning of this blog post where I said one of the best things that can happen to a trader is that they lose their first trade so they are aware of the risks, this is along the same sort of theme. Feeling like you are invincible is the quickest way to get burned in most areas of life, including trading leveraged high risk markets like forex. Staying humble will keep your risk management in check, which will keep you and your trading account alive.
DON’T TRADE WHEN YOU WOULDN’T DRIVE A CAR
I love a comparison between trading and driving. I never seem to run out of them. Driving is dangerous right? We all acknowledge and accept that. Yet people are allowed to drive around every day unsupervised. There are strict rules In place about driving under the influence of alcohol or drugs or driving without your glasses if you need them. We’re also told not to drive if we are tired or feeling unwell. All of this applies to trading as well. If you wouldn’t legally or morally be allowed to drive a car, don’t open your trading charts!
MEDITATION IS HELPFUL FOR MANAGING EMOTIONS
I’m a big fan of meditation. I try and do about ten minutes a day before I start trading. I find it noticeable easier to feel in control and focus on trading well rather then making money.
There is an excellent book by Dr Alexander Elder called Trading For A Living which I highly recommend for anyone interested in continuing to learn about trading psychology. In the book he says the secret to making money as a trader is to not think about making money so much as to focus on trading well, because making money is a natural side effect of trading well. I’ve linked to that book below as well as a couple others which are good follow on reads if you want to go further into trading psychology. I’ve also recently made a YouTube video on this topic which is linked here
Happy Trading!
Love From, Your Trading Coach x
TRADING FOR A LIVING by Dr Alexander Elder
TRADING IN THE ZONE by Mark Douglas
MASTERING TRADING PSYCHOLOGY by Andrew Aziz