Mastering the Psychology of Trading Forex

Forex trading is the ultimate test of nerves.

Whenever you hit that final button to either BUY or SELL a currency pair, the game is on!

Your money is constantly bouncing up and down and you have to helplessly watch. If you made a bad decision, it's worse than any form of torture as you watch your money fly out of the window. Make a good trade and it's the thrill of a lifetime as your profit soars higher and higher!

Trading Forex is like taking a ride on the tallest, steepest, fastest roller coaster out there. Except it is not a machine built from steel, nuts and bolts. Instead it is composed of your bank account!

Trading Forex is a mental battle which requires endurance. Having a good strategy is not enough!

You need to prepare for this type of psychological game.

Experience usually is the best teacher and a sure-fire way to master anything in life.

Not so in this case. At least not by much. You learn to ride out the highs and lows a bit, but it never really gets any easier losing money.

The one big tip I can give you all will train you to be a zen master at trading!

First, make sure you are doing the following things all ready:

1. Investing with money you CAN afford to lose.

Losing this money should not determine your financial future. Obviously, I'm not saying that you plan on losing this money. Just make sure that if you lose your Forex investment that you will still be able to pay all your bills and survive just fine!

2. Trade with an appropriate lot size.

Smaller is better in most cases. Trading with a big lot size is inappropriate for smaller accounts. The goal is not to get rich overnight, but to build wealth slowly and consistently. Using a smaller lot size dwarfs your losses. They suddenly are not that dramatic. Naturally, they are still not fun, but you should not be losing sleep over Forex losses!


3. Remember the 2-4% Rule!

Only risk 2-4% of your account on a single trade. One loss is suddenly not that devastating. In fact, you could lose dozens of times consecutively and still not blow your account. This gives you lots of rebound chances to come back and win in the end!

4. Use a Trailing Stop To Lock in Profits Quickly.

This technique can turn a slightly positive trade into a winning trade - no matter what happens in the next 5 minutes, 2 hours, or 4 days!

Basically, a trailing stop protects your profits once your trade is in the black!

How does it do that?

Simple. Let's say you enter a trade and it is currently +10 pips. You have a goal of +25 pips total. But you do not have time to sit around and watch the trade forever. You want to lock in profit now and leave your computer alone for awhile.

First, you re-adjust your stop-loss so that it is +2 pips. That way, if the trade reverses on you, you will gain +2 pips NO MATTER WHAT! Now you have a winning trade - no matter what you'll get 2 pips.

Granted, 2 pips is nothing spectacular. But it is a great sense of freedom knowing that you will not lose this trade no matter what happens.

Now, you set a trailing stop for 6 pips. This automatically re-adjusts your stop-loss every +6 pips. This means that if the currency moves up another 6 pips (leaving you +16), that your S/L will be adjusted to +8 pips (It was at +2, now we add 6 = +8). If it goes up another 6 pips, so does your S/L. And so on, until you reach +25 OR the price reverses and triggers a lower S/L.

Either way, you will make between +2 --- +25 pips. Great peace of mind here and simple to set up.

*TIP* A great method to really let profits run wild is to set a moderate Trailing Stop without setting any kind of Take Profit Level. This means that as long as the price keeps going in your favor, the Trailing Stop will automatically re-adjust your S/L so that you will constantly be in profit. A Take-Profit sometimes ends the trade prematurely, meaning that had it not been there the Trailing Stop could have kept following the price tightly for an additional 5 - 40 pips!

These tips will take a lot of the angst and frustration out of trading. You should always be practising these things, regardless. They are simply good pieces of advice!

If you still find you are having trouble coping with losses, try the following techniques:

1. Visualization and Reinforcement

Every time you close a negative trade out, do not think of it as losing. Just think of it as a temporary setback. You will now win the next 3 trades. Try to use it as motivation.

Use visualization -- imagine that you did not close the trade and it ended up blowing up your account. You can even write something down and read it to yourself as a sort of "losing trade mantra":

"This is only a temporary setback. I now have extra motivation and confidence to win the next 3 trades. I will focus all my energy on recouping my losses as fast as possible, but I will not trade based on emotion. Losing trades happen, but they do not define me as a trader. If I had not stopped the trade, it would have eventually blown my account up. This is what separates the winners and losers in Forex. I have the courage to admit my mistake and move on to profitable trades. I will analyze why I lost this trade and learn from it. I did not lose, I simply found something that does not work."

This will reinforce your beliefs and make you a much stronger trader in the long-run. Just repeat that phrase (or something similar) each time a trade does not go your way. Say it with emotion. Really mean it. Believe in it. Just do it.

I once heard an amazing quote dealing with the topic of mastering the psychology of Forex. This is a paraphrase, but you'll get the idea. This is what I'll leave you with. Please think about it and let it sink in fully and completely. It will make you a winner. I promise.

"From a psychological and emotional standpoint, you should feel no differently when closing a trade for a loss or for a win. This is the definition of mastering Forex psychology."