Trading Mindset

Of course trading psychology plays a signicifant part for you. After all, you can’t expect to be a successful trader without having rational thinking and emotional control. Forex must be treated like a business, especially if you want to generate a steady income. If you treat it like a casino, forget all what we talked about so far, flip a coin – heads is Buy, tail is Sell – and hope you win. If you didn’t win, repeat the procedure, but this time double the amount risked. It is the easiest and fastest way to lose your money in Forex and, of course you don’t need to read and learn about support and resistance, indicators or money management.

Trading Psychology – Money Management Tips

Since I don’t think you are reading this because you want to gamble, we are going to speak about the importance of money management and trading psychology in Forex, just like in any other business. First of all, you must understand that this is not a “get rich quick” game and you can’t trade for a month and become a millionaire. Instead, you must apply sound money management techniques that will keep you from blowing your account.

First rule and it’s an important one: don’t invest money until you are constantly successful on a demo account. Even when you are successful on demo, remember that trading your own, real money on a live account will be much different than on demo. This happens because trading on a demo account has no psychological impact. You will never feel the fear of losing money when trading virtual money and as a direct consequence of that, you will make better decisions because you are not influenced by fear. This way, you can develop trading psychology that’s sharp and ready to deliver. So trading demo and being successful at it doesn’t mean you will have the same results on a real account, but it’s an important step that every trader must take before investing real monpey and it prepares you for the things to come.

Never invest more than you afford to lose. Don’t put your last penny into a trading account hoping that you’ll get rich and brag to your friends about trading the markets and knowing where they go. That’s not the way to go and it’s not the right state of mind. Instead, you should invest a small amount. Of course, what “small amount” means differs from person to person, but I consider it to be the amount that lets you sleep at night if it’s gone; whatever sum that if lost will not cause you a big discomfort.

Know that you are going to lose some and win some, but in the long run, if you follow the rules, you will succeed. The essential trait of any trading psychology is understanding that there are always 2 outcomes. Imagine the greatest boxer of all time entering the ring to defend his belt. No matter how good he is and how confident that he will win, he knows he will get punched in the face and doesn’t expect to dodge all the punches. His goal is not dodging everything, but delivering more damage than his opponent, making his punches count and not absorbing too much damage when he gets hit. The same way in Forex, we must understand that we will suffer inherent losses, but we must make the wins bigger than the losses. Also we must learn to control the losses by using a stop loss. This way, we know how much we can lose and accept that potential loss.

Never risk more than 2% of your account. You probably heard this one before and that’s good because when you read something over and over, it gets printed into your brain. We will talk more about the 2% rule in part 2 of this article. Keep reading over Trading Psychology and Money Management Trading Psychology.

Also, try to get on first basis with these awesome 10 trading strategies to get your Forex career going.

Forex Risk Management and trading psychology are tightly connected. Like we previously said in part 1, never risk more than 2% of your account. This amount can go up to 5%, depending on your appetite for risk, but at least in the beginning of your trading, try to keep it at 1%. Then, as you  progress and become a better trader, you can increase the traded amount (but we recommend keeping it lower than 5%).

You are probably thinking that by using 2% of your account, you will never make enough money to make a living from Forex trading. That’s not true and I am going to show how you can make money by using just 2% of your account and compounding your winnings.

Forex Risk Management – The 2% Rule

Let’s say you have a 1000 USD account; 2% of that would be 20$ so you can enter a trade with a 20$ risk (remember to calculate position size accordingly). After winning some trades, your equity will be higher and consequently, the 2% will be more than 20$. That will allow you to trade using a bigger position size and of course, your winnings will be bigger. So you still trade and risk 2% of your account but 2% is more now than when you had 1000$ in your account.

The downside to this is that if you lose a lot, then your 2% will be significantly less than when you started and recovering will be harder because you will need more winners than you had losers to get your account to 1000$. Forex risk management is not without flaws, like everything else.

Risk and Reward. Imagine you risk 20$ and you aim for 20$. That means you have a stop loss of 20$ and take profit of 20$. You could lose 20$ or win 20$. This way, if you win 50% of your trades and lose 50% of them, you will break even. This is a Risk-Reward (R:R) of 1:1.

To make money using a R:R of 1:1, obviously you have to win more trades than you lose. If you were to increase the risk-reward ratio, that would allow you to make money even if the number of your losing trades exceeds the number of your winning trades. In order to do that, you have to increase the amount of pips you are aiming for, but use the same stop loss: stop loss is 20 pips and take profit is 40 pips. This way, you get a R:R of 1:2. You risk 20 pips and get 40. Now, if you were to lose two trades in a row and win the next one, you would be at break even. You have 2 losers and just 1 win and still, you haven’t lost any money. So you need to win just 33.3% of your total trades to break even. Everything above that percentage is profit and be sure to get comfortable with Forex Risk Management mindset.

Forex Risk Management – The 1:10 Risk/Reward ratio

You might think – “Why not use a 1:10 Risk Reward ratio? This way I only have to win one trade out of ten and still make money.” Well, it’s not that simple. Let’s say we use a 30 pip stop loss. To achieve a 1:10 R:R ratio, the take profit level must be 300 pips away. The chances of gaining 300 pips using a 30 pip stop loss are very thin to say the least. So when deciding the risk-reward ratio, you must always think about the probability of success of that trade. Look at the charts, the trading environment and decide based on technical and fundamental analysis. If you enter the trade exactly at the beginning of a strong trend, your chances of making 300 pips increase, but I wouldn’t recommend using such a high R:R on a normal basis.

Make sure you read part 3 of the article, as well as going back to part 1 if needed. To understand the basics of risk management, visit the following guide.

Having a proper forex training before actual trades are made goes without saying. In order to become the best trader you can possibly be, it’s important to possess certain information and be able to use it fast. Of course, you must know how to interpret a chart or to use the right technology for trade execution, buy some other factors play their parts as well. We already tackled Trading Psychology and Forex Risk Management in previous two guides, time to outline everything in one article and give you the forex training you deserve.

It’s often important for a trader to be able to read a chart and have the right technology so that their trades get executed, but there is often a psychological component to trading that shouldn’t be overlooked. Setting trading rules, building a trading plan, doing research and getting experience are all simple steps that can help a trader overcome these little mind matters.

Forex Training Tip #1 – Controlling your emotions during Forex trading

Never try to take revenge on the market. You will have losses, that is for sure, so be mentally prepared for them. When you lose, never enter another trade just to make up for the losses. Instead, enter another trade only when the rules of your strategy are met and if technical and fundamental analysis agrees. I strongly suggest to step away from trading if you are having a bad day and lose more than three trades in a row.

Forex Training Tip #2 – Be Disciplined in Forex Trading

Be a disciplined trader. Being a disciplined person allows you to be a disciplined trader and that is an absolute requirement for success in this business.

Let’s say that you have a profitable strategy and you follow good money management rules. One day, you get 4 winners in a row and you start thinking that you cannot be defeated by the market. Then, you decide it’s time to disobey your money management rules and you double your position size. Unfortunately, the market reverses against your position and you lose all the profits made that day. Now frustration sets in and you think that the last trade was just a fluke and that you must trade more to make back the profit that you lost. Wrong decision after wrong decision! The last trade also goes south and you end the day with a loss. A disciplined trader would never act this way, he would never disobey the rules of his trading system. After all, he knows that system will make him money in the long run and he doesn’t throw it out the window just because he had a winning row.

Forex Training Tip #3 – Overcome Fear of Losing Money When Trading

Do not fear the market. Try to accept the loss before placing the trade. This way, you will not fear the outcome because you already accepted the fact that the worst can happen. I’m not saying “don’t respect your money”, just that you cannot let a loss turn you into a fearful trader who is afraid to place his next trade. When you are hesitant, you begin making wrong decisions; maybe you decide not to take the next trade, but that is the winning one and you missed it because you were afraid. Don’t follow your gut, follow your system. Read also our tips for money management in Forex trading.

Finally, we advise you check out what Investopedia has to say about trading psychology.