eToro Education: 2/5/2014

How to Be a Disciplined Forex Trader

This is a brief look at how to be a disciplined forex trader.

Forex trading is an emotionally tasking endeavor. This is not surprising, given that as human beings, we place a lot of premium on our money, and whenever money is involved, we tend to get a lot emotional about it. Most of the emotions that surround money are negative. Monetary gain is associated with a feeling of joy and elation. But money does not need to be lost for negative emotions to come in. Even a slight delay or a sense of money being endangered unleashes a flood of negative emotions that could interfere with rational judgment. So it is with forex trading.

Unfortunately, forex trading has largely been painted as a get-rich-quick venture. As such, people place a lot of hopes on making money from forex without taking time to master the game and the emotions involved. It takes a disciplined trader to be able to keep his emotions in check, clear the mind of all clutter and focus only on the facts of the trades as they setup and evolve.

How can one imbibe forex discipline? Imbibing forex discipline is a function of controlling emotions and imbibing habits that instill discipline in trading.

Controlling Emotions

Controlling emotions is an important aspect of forex discipline. The moment a position is negative, it is not uncommon to see traders exhibit any one of the following emotions:

• Fear
• Anxiety
• Confusion
• Panic

These emotions (especially that of fear and panic), ultimately will force the trader to try to liquidate losing positions as a measure of preserving capital. The compulsion is so strong that they may find themselves unable to trade with confidence in future, even when conditions are favorable for profits. It is not unusual to see traders hit by this bug to cut profits prematurely. Another negative emotion that can be just as bad is greed. This usually surfaces when positions are in the green. It comes up in two ways. One way is unduly hanging on to winning positions in an effort to grind out every last pip possible. The second occurs when a trader closes a position in profit, and risks a re-entry when he sees the currency pair continue its advance in an effort to maximize the position. Snag is that unlike the previous entry, this one is in uncharted waters where anything could happen. A retracement will end up eating off some of the profits previously gained.

Imbibing Habits that Instill Discipline

There are a few habits that can make it easier to achieve trading discipline. Some of them are as follows:

1. Setting targets. It usually works well to set a realistic pip target for the day or week or month and stick to it no matter what.
2. Developing trading plans and strategies for trades and sticking to them.
3. Refusing to overtrade. A trader should learn to walk away after a loss and live to trade another day.
4. Timing entries properly. For example, if a currency pair’s support is at 1.3010, and the market price is at 1.3030, check to see if the price had at any point in time come close to or actually touched 1.3010 in the recent past. If this is the case, do not give in to the temptation to place a Buy trade at 1.3030. The price is very likely to retrace to 1.3010 before it starts to reverse upwards. If you place a trade too early here and decide to cut your losses after going 20 pips in the red, you will lose out. The feeling is even worse when the price eventually reverses in your favored direction. The subject of trading discipline cannot exhausted in a few short sentences, but this article will at least, direct your mind to areas where you need to start making adjustments in order to be a disciplined forex trader.