Why do traders fail to minimize risk in forex trading? Why is it important to consider the trader’s emotional state of mind? Does it account Or Not?
Only awareness of risk is not enough, you should learn how to manage it. Plus, you should also learn how to recover your lost amount to minimize risk factor in future.
In this post, we will discuss expert Trading Psychology and Risk Management tips!
Trading psychology reveals how your emotional decisions impact your trading journey. Learning risk management is important for safe trades. Technically, you can use stop loss, take profit, low leverage, to avoid risk. Simply if you don’t risk more than 1% to 2% of your actual account balance, you can win one day.
No matter if you are a swing trader, day trader, or full-time trader, and you want to be a full-time forex trader, learning trading psychology and risk management is important for you. Again, only learning is not enough, you will have to practice all the skills in your demo account before moving to real money trading.
So, keep reading trading buddies, we have many helpful tips for you!
What Is Psychology of Trading
Trading psychology is a synopsis of the trader’s mental state and its impact on trading. It may help traders to know when they are going in the wrong direction. Further, it tells how greed and fear impact your decision in trades.
Trading psychology exposes an individual’s personality traits that are still hidden. To get success in trading one should be aware of his mental and emotional state. In forex knowledge, experience and skills go side by side with trader’s psychology.
It’s a game of mind plus a game of money. If you win your nerves and emotions, you will surely win this financial war. You are the best analyzer of your psychology than any third person.
But remember your brokers behind the scene are very keen to know about greed, harshness, and fear in your nature. Don’t give them any clue that you have some negative sides to your personality.
How Do You Master Trade Psychology: 6 Tips
How important is psychology in trading? Remember it’s not just risk management. Expert traders work on making a profit and reducing risk at the same time. If your trading psychology is to think more about risk, you will never make a profit.
Below are a few important points to consider for improving your trading psychology:
Discipline Your Trade
Discipline is keynote! Plan everything in your mind when to enter the trade and when to exit. It means you should know in advance at what profit ratio you will enter in trade and at what risk or loss you will exit. This type of disciple will help you to make wise decisions and avoid unbiased decisions.
Say NO to Fix Trade Positions
If you are stuck to fix numbers or percentages to exit the trade and put a stop loss, you are in the wrong direction. Always fix your stop-loss position and exit position on the basis of market volatility.
In this way, you can take better advantage of price fluctuation. In the case of high volatility, you should widen your profit orders and stop loss to make more profit.
No-Risk Trade Strategy Is Wrong
Mostly fear of losing overcome the pursuit of earning in forex. When you fear all the time and set your stop loss at the entry point, your fear will win not trade. It is better to exit your trade with a small loss than to make no profit at all.
You can’t avoid risk but you can tackle it with your skills. Never fix your point of entry, maybe prices react against your expectation.
Say NO to Sudden Position Sizing
Most of the times traders make sudden changes in position sizing. You should indeed get the advantage of volatility. But at the same time when changing your position size, you should consider the expected profit ratio. If you are in doubt never change your position size.
The best way is to take start with a small position and then gradually move up when the trade goes in your favor.
Make Sure When to Skip Trade
You should know in advance about where to put stop loss and take profit orders. When you discover that the risk ratio is higher than your expectation, you should skip the trade.
If you try to increase your reward despite a higher risk ratio, you will lose your profit soon. Ask yourself before opening any position that when you will skip and when to put stop loss.
Set Clear Trading Goals
Whether you are a swing trader or a full-time trader, setting a clear target is helpful. In this way, you can compare your performance and grow your capital. Expert traders always keep journals to note down their performance.
They set weekly, monthly and yearly goals. They actually not only work on making a profit but they also add up this profit to reinvest. I would say compounding your forex trading is the best option if you want to increase your profit as well as capital.
How Do You Do Risk Management in Trading: Mastering Risk Management
Improving trading psychology will only work when you master risk management skills. Every trader knows that there is risk in the forex market. Before we move on to risk management tips, Let’s briefly discuss the types of risks you come across in forex trading:
- Leverage Risk
- Liquidity Risk
- Interest Rate risk
- Risk Of Losing Capital
- Risk Of Scam Brokers
7 Tips to Overcome the Risk Factors Involved in Trading
Learn More About Risks Before Trading
The first tip is to educate yourself about all types of risk factors involve in this money market. If you want to be a full-time trader, you should get a proper certification or forex graduation. In this course material, you will come across all types of risks and ways to lower them.
If you are a short-term trader, there are so many resources available online that can teach you. You can join seminars, webinars and buy books to read more about forex.
Must Use A Stop Loss
I would say use stop loss is not enough, MUST USE STOP LOSS. If there is a risk in forex, this risk is in your control. And stop loss is the only way to control your money from losing.
Suppose you place a trade and the situation goes against your expectations, when an asset hit stops loss, your trade will close automatically. Still, you need to be aware of stop-loss hunting and other broker scams as they are additional risk factors.
Secure Your Profit With “Take Profit” Option
It works on the same principle as stop-loss does. But stop-loss tends to close your trade when you start losing at a certain point. Similarly, take profit options to allow you to end trade when your profit reaches a certain level.
I would suggest a 2:1 ideal reward- risk-ratio. If you set your take profit at 40 pips, your stop-loss position would be 20pips below the entry price.
Don’t Risk More Than 2% Off Your Account Balance
Expert traders never risk more than 2% of their account per trade. You should think in the same line. It’s easy to lose but is challenging to recover your lost amount in forex. When you lose more than 2% of your expectation, you need to get more profit out of your remaining capital.
If you lose 1000$ with 5000$, now you will work with the remaining 4000$ balance and you may need to set a more profit ratio to cover your lost amount. So, don’t break your set rules of reward-risk ratio!
Say NO to High Leverage
Leverage is a double-ended sword. If it can make you win more, it can also make you lose more. The potential risk of losing is higher with high leverage. If you are a beginner, say strong NO NO to high leverage unless you have a proper understanding of potential loss.
Suppose an account of leverage 1;30 means that you can place a trade worth up to 30,000$ on a 1000$ account. That’s crazy! So say NO to brokers who offer the high leverage.
Prepare yourself For Worst Position
About 90% of traders quit trading as they are not prepared to cope with the worst situation. You must have extra bucks in your account in case you lost all your capital. Otherwise, you will have to end up your forex journey.
That is a hard reality. Keep yourself updated on market news and the history of currency pairs you trade. Sometimes history repeats itself.
Say Big NO to Emotions
Your emotions are rather riskier than forex. They can throw you in bad times. So, keep your emotions under control. Forex gives you all opportunities to trade safely but your emotions will drive you to make more and more money earlier.
I would say steel nerves to stand stable in this financial war. There is no space for unbiased decisions and greed in this market.
Broker choice is one of the important factors for safeguard your investment. ICMarkets is one of the best regulated and low spread ECN brokers you should check.
Frequently Asked Questions (FAQs)
How do day traders control emotions?
The simplest tip to control your emotion in trading is to stay away from fear and greed. These are your worst enemy throughout your trading journey. Confidence is the key to success. But overconfidence or hopes are ways to stay positive but not a trading strategy indeed. So, keep all of them within limits.
How do you control greed trading?
Technically, you can control greed when you bet small and decrease your trade volume when things are going against you. Morally, you can avoid greed as it is the curse and it can snatch what you have in your hand in favor of what you don’t have.
Usually, market makers and brokers take advantage of the greediness of the traders. We have detailed articles about how do forex brokers and market makers trade against you.
In the above post, we discussed tips for mastering trading psychology and risk management. If you are a beginner, I would recommend that reading and educating is effective only when you practice them. So, practice all the tips in your demo account.
Guess your weak areas and strong areas. I would again say you are your best observer in forex. In case you are still failing after a demo account and forex education, you need mentorship.
Remember you can’t master trading forex with education only. You will have to master risk management skills and improve your trading psychology day by day. That’s all I want to Say! Bye!
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