Are these 3 Demons Haunting Your Forex Trading Strategies?

You want to be a successful forex trader. You want to retire from your 9-5 job and enjoy working from anywhere in the world. You want to spend more time with your family, and you want to provide your loved ones with the kind of lifestyle that they deserve.

Trust me. All this is possible when you invest in the forex market.

However, success in online forex trading, like all other good things, does not come on a silver platter. You have to work for it. You have to condition yourself for success. You have to change some habits, and adopt other habits of successful forex traders, and you have to open your eyes to what is really happening in the market.

What Limits Your Success as a Forex Trader?

A lot of forex traders in Kenya believe that they need an exceptional trading strategy or advanced education in finance and related fields to be successful in forex trading. Nothing could be further from the truth.

Good academicians do not always make good forex traders and people who develop incredible trading systems do not always end up profitable. Long-Term Capital Management (LTCM), a hedge fund management firm that was based in Greenwich, is a good example of how good academicians do not make the best forex traders.

LTCM’s board of directors included Rober C. Merton and Myron Scholes, two Nobel Prize winners whose contributions to the economic theory are among the most valuable in our century. Nonetheless, their articulate analytical skills and spectacular knowledge of the markets did not prevent the collapse of the firm in 1998.

It is clear that lack of trading knowledge was not the cause of collapse for the most reputed hedge fund firm in Wall Street. Instead, it was the 3 demons that finally got up with them and razed their firm to the ground.

These 3 demons, if not tamed, will also be the cause of your losses.

What am I Talking About?

Emotions.

If you trace the source of failure for every trader, beginner, intermediate and pro alike, you will realize that their failure is not caused by lack of understanding of the market. Majority of the failure in forex trading is rooted in emotions.

There are particularly 3 strong emotions, which is not tamed and handle cause the fall of many a trader.

Greed

The greed demon has to be the most tempting among traders. The demon has a long and luscious tongue that constantly whispers to you that unless you do act now, you will miss the most profitable trading opportunities in the market.

The greed demon is always on its feet. Like it is high on something. It is always urging you to enter into trades faster. It will cause you to lose focus as you rush to make trades that have not been carefully analyzed. You have to recognize this demon for what it is. It is an emancipated and empty-bellied demon since none of its exhortations for speed and greed lead to profits.

Every trader has a natural inclination to want to make money. Every trader attaches great importance to financial success. I wouldn’t be trading if I was not profit-oriented. In fact, no trader would withstand the pressure of the market if they were not driven by the desire to make money. The drive to make money, in moderate proportions, is healthy and a requisite driving force for traders.

The drive to make money, however, becomes unhealthy when it becomes the main driving force of your trading decisions; when it starts interfering with your trading decisions and trading strategies. Only logic should dictate your decisions in the market.

So, how do you strangle the Greed Demon and ensure you are making the right trading decisions?

The first step to strangling the greed demon is to ensure that you have developed a disciplined approach to trading. This will reduce the impact of impulse decision in your trading.

By developing a trading system and strictly following it from the very start, we can ensure that greed has no play in our trading decisions. You will be able to make your decisions based on a tested and proven trading setup.

Emotions can only thrive where fear and uncertainty are in plenty. To prevent fear and uncertainty, you need to make sure that you have developed, backtested and taken your trading system on a roller-coaster ride on a demo trading account.

Also, keep in mind that your desire, motivation and quench for profits will not actually make you achieve profits. There is nothing to be achieved by bowing down to the demon of greed.

Fear

You will recognize this demon by its sharp and shrieking voice that is always shouting to us of imminent dangers ahead. The demon injects second-thoughts and doubts on whatever trades you want to take.

The Fear Demon has the opposite role to that of greed. Instead of pushing us to trade like automation weapons, opening and closing positions with the speed of lightning, fear does the complete opposite. It tries to convince us that we cannot trade profitably, regardless of the meticulousness of our trading systems and the thoroughness of our analyses.

If they overcome fear long enough to get into trades, fearful traders will not wait for their positions to realize profits. They close positions prematurely, and end up making massive losses from drawdowns, commissions and broker spreads.

Apart from not taking trades and closing positions prematurely, fear also leads to more irrational decisions.

When dealing with fear, it is important that you realize the distinction between fear and conservative trading. A conservative approach to forex trading is usually a recipe for success. A conservative forex trader will be skeptical of all information he gets, but that does not stop him or her from taking action when his/her trading system shows that a profitable trade setup in in play. A fearful trader on the other hand is not only incredulous about the opinions of others but also about everything that his trading system tells him. He is always confused of what to do, where to look, and which trade to setup to take and which one to avoid.

A fearful trader does not trust anyone, not even himself or his trading system. He cannot evaluate the markets effectively as he has a gnawing mistrust of all trade analysis tools. The trader always ends up trading in a style akin to casino gambling; the outcome is always disastrous long term losses.

How can you strangle the demon of fear?

To avoid the calamitous results of fear, you must train yourself to realize that no trader ever became successful through randomness. You must be convinced that you are in full control of your choices. You must have a clear trading system that you adhere to until it proves that it is no longer profitable. All this is possible when you have a logical and sober approach to trading, something that can only be achieved through patient and persistent study of the forex market.

Another way to strangle the demon of fear is to avoid overleveraging your account and having a tight risk management strategy, such that a losing trade would not wipe out your whole account.

Euphoria

Euphoria is the queen of all forex trading demons. It promises infinite wealth in a limited amount of time.

Don’t be fooled.

Euphoria can only deliver destruction, disappointments, and destitution.

Euphoria works hard to ensure that you only see the rosy side of investing in online forex trading. It makes you think that you have somehow been blessed with the Midas Touch. It makes you think that everything you touch will turn into gold.

Most traders will least be affected by euphoria because many are aware that being successful in forex trading is no child play. While it is possible to make huge profits in a short time, such results are usually the result of many hours poured in studying forex and practicing trading on a demo account.

In case of many forex beginners who do not have background study or practice, euphoria usually results in despicable results. Beginners usually develop euphoria after a string of profitable trade setups that make the trader believe that all is rosy in the markets. As the trader gets comfortable, his analysis slackens, he takes larger unmitigated loses, and this is when the demon decides to strike.

The key to vanquishing this demon is to realize that no analysis or trading system is error-proof. A successful forex trader is always skeptical of his systems, although this does not stop him from taking trades as he bases all his decisions on logic alone. The successful trader realizes that the success of previous trades is not an indicator of profiting in future trades.

A successful forex trader does not get excited about his past performance. The next trades may or may not be successful depending on how diligently he has studied the market. Thus, the best way of killing euphoria is realizing that the success or failure of previous trades does not impact the outcome of the next trades. The success of every trade is only Dependant on how carefully you have studied and analyzed the market prior to opening a position.

Conclusion

The problems I have analyzed above are associated with trading psychology. In order to perfect your trading psychology, you must work to reduce the role of emotions in your trading decisions. You must understand that your success or failure is not a matter of luck, but a consequence of the choices that you make.

I have always pointed out that it is hard to get an unleveraged account wiped out from a single trade. If you lose all your money from a series of trades, then it is clear that luck has no role to play in that.

The best way to deal with the emotions that are associated with online forex trading is to develop a logical approach to trading. Study the market and understand its mechanisms. Understand the forces that drive price. In this website, I strive to equip you with the basic understanding of these factors and some more. To never miss any of the informative news, consider signing up for my newsletter.