Forex Trading and Fear

by Stephan Smith on January 31, 2011

Trading currencies can be very taxing on one’s emotions. Let’s face the hard truth, the Foreign Exchange Market has the ability to grant money or take money with the slightest of price movements, and there is nothing a currency trader can do about it. There is nothing a currency trader can do to influence the price of a currency pair to move in any particular direction. They are completely helpless when it comes to making the price of a currency pair move in one’s favor.

So when currency traders invests one’s hard earned money into something that one has no control over, emotions do tend to run rampant; especially when a large amount of money, relative to the currency trader, is at stake. With that said, it’s definitely understandable if one becomes somewhat emotional in this business, but by no means is it acceptable. For as soon as you start making decisions based on feelings and emotions, the more unlikely you are to profit.

The most influential emotion suffered by a great majority of currency traders is fear. Every one of us experiences some degree of fear when participating in the Currency Market. Though it is impossible to get rid of all degrees of fear, whether it be slight nervousness to full blown panic, keeping fear under control isn’t just important, but vital if one plans to increase the probabilities of trading the FX Market profitability.

How does one control the fear emotion? By putting at risk smaller amounts of money. Think about it. If one is risking a relatively small amount of money, then fear becomes subdued allowing one to think clearly. When you have little to lose, you won’t break into a panic if things start looking sour. So write this down: ‘Risk a relatively small amount of money when trading currencies in order to control the fear emotion.’ When one experiences fear in currency trading, it is the fear of lost not of gain. Who honestly is afraid of profit? Traders only fear loses. All kinds of loses; big loses and small loses (but bigger loses are the really bad ones). When one limits the risk of loss, then one limits the fear.

It’s important to not let greed influence your trading decisions and cause you to risk more than your comfortable to lose. If greed does have an influence, then fear will arise. And fear does nothing but effectively cloud judgment.

Before entering a trade, I say to myself, “How much money will I allow myself to lose with this trade?” I know it may sound somewhat insane to be thinking about losing before I even enter a trade, but I assure you, it’s not. One must acknowledge and prepare mentally to lose and one must ensure that lost doesn’t make or break one’s account.

It seems to be a commonplace practice in the Foreign Exchange market to risk two percent of an account in any given trade. If you can afford to risk more and you aren’t influenced by fear when you do so, then go right ahead. If you have a less tolerance for risk, then risk less than two percent. Your goal here is to risk the correct amount so that fear doesn’t play a role in your trading decisions.

I also want to clarify one more thing. Though I may prepare myself to lose every trade I enter, that is obviously not my objective. I, along with every other currency trader on the planet, wants to have winning trades one hundred percent of the time. But that, unfortunately, is unlikely. But with fear under control through risk management and loses quantified prior to realization, profitability becomes more of a probability.



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