Psychology is extremely important in Forex trading and is often overlooked. It can be the make or break of a trader. In Forex trading, things can change very quickly in the market forcing traders to make decisions on the spot. Our psychology will determine how we handle such situations.
Treat your Demo Account like it’s your Live Account
If you are new to trading, trialling a demo account is essential. However, not to inflate your expectations you should trade as though this were your real live trading account. Trade as you would if it were your real money.
When opening your MT4 Demo Account, ensure that you choose an account type similar to the live account you plan to trade with. Pick the same account size, leverage, currency etc. that you would trade with when you make the switch to live trading. By doing so, you will be able to gauge the more typical results you will see from your live account.
Don’t be tempted to place massive positions or open orders without looking at your charts or Market Watch board. Don’t trade on a whim – again – trade as though this was your real money.
Dealing With Emotions
One’s emotional psychology greatly comes into play when trading and too many beginner traders underestimate this in their decision making process. In trading, one needs to control both feelings of fear and greed.
When the market turns in the opposite expected direction or sudden news pushes your profits into the red, the first immediate emotional responses are fear and panic. Realise that this is a natural and normal reaction and not to impulsively make decisions on it. Recognise and rethink. If you cut your losses now, will you be missing out on bigger gains in the longer run? Look back at the technical analysis. What has history previously suggested about this market moment? Do some analysis and then make your decision.
On the flipside, greed can be just as damaging. It is very easy to be tempted to just leave a trade open when it is performing better than you had expected it to. It may be best to take your profits while you see them than to leave it open to the risk of whipsaw movements – those sudden and quick moves in the opposite direction. Not only are you at risk of losing your gained profits but also going into a loss. Again, this will be a good time to look back at your charts. For those who are worried that they’ll be overwhelmed by such feelings, placing conditions on yourself such as Take Profits will be important.
Sticking to a Trading Plan
Make a trading plan and stick to it. Have a look at the following steps that make up your trading plan.
1. Study and learn
Draw up charts. Take on both technical and fundamental analysis. Examine the historical trends. See what key economic events will be coming up. Follow social media accounts like our Twitter feed to get notifications on event outcomes such as CPI and GDP results.
2. Work out your trading style
Are you a day, swing or position trader? Which timeframe of trading or trading session are you most comfortable with? For example, if you are a position trader, stick to that and don’t be swayed by the short-term movements and look to your overall longer term plan.
3. Determine your risk levels
Once determining your reward: risk ratio, stick to it. It is fine to alter your risk levels when your financial situation improves but be sure you are fine to do so for a long period of time. Read on the next section about Risk Management and how you can take this plan further.
4. Set Trading Rules
Once establishing your reward: risk ratio, incorporate them into your trading rules. Trading rules need to be abided by so as not to allow your emotions to come into play. If you set the rule of when to buy or exit on a trade, do so. Some traders choose maximum profits and losses for the day and if either is met, then the trader ends their trading day. Sometimes, it is better to take some profits than to lose it all. Just as much as it is better to lose a smaller amount than leave it in the hopes of a turnaround.
5. Sticking with your trading strategy
A mistake many make whilst experimenting with strategies on the Demo account is to jump from one strategy to another before giving it time to work. Only after some time and analysis will you be able to determine whether the strategy will work in the long term. If you have found a successful strategy that matches your style, be willing to stick with it even after a few losses. Don’t be so tempted to change your trading rules and style so quickly.
Make sure you to go over the previous section, Risk Management, to gain further understanding on Risk: Reward Ratios and what techniques you can use to manage your risk.
Start your practice with the free MT4 Demo Account today. If you need help or have any questions, please free to contact one of our account managers or see our FAQ Support Centre. You can also visit our Education Centre to learn more about Forex.