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You are probably aware by now that emotions and Forex trading are like water and oil, they don’t mix.
The key to success in this business is discipline, and you can’t do that if you’re being influenced by emotions every time you sit down at your computer.
But not all emotions are bad, right?
For example, showing excitement after a winning trade or feeling on top of the world after hitting your monthly goal; those are positive emotions and must, therefore, be constructive.
Positive? Yes. Constructive? No.
In fact, I’ll go right out and say that an overly positive response is just as damaging to your longevity as a trader as any negative response.
If that doesn’t quite compute, it’s okay because we’re going to dive into all the details shortly. By the time you finish reading this post, you will have a whole new outlook on the way you’ve been managing your emotions while trading.
Let’s get to it!
Sir Isaac Newton was no Forex trader, but he was on to something when he created the three laws of motion, namely the third law if we apply it to emotional trading.
In short, it stated that “for every action, there is an equal and opposite reaction.”
An example would be a fish swimming through water. Newton’s third law states that the force being applied to push the water backward is equal and opposite to the force being applied to propel the fish forward.
While Newton developed these laws during his study of physics, they are just as applicable to other areas of life, such as the relationship between positive and negative feelings.
As Forex traders, we know all about the drastic effects emotions can have on our trading. But most coaches and mentors spend time talking about how to control negative thoughts and feelings.
While that is certainly helpful, the real danger lies in those unsuspecting exuberant periods following winning trades or profitable months. In fact, I just wrote about the idea of how Forex losses come when you least expect them.
But I want to take a different angle with today’s article. Instead of talking about how overconfidence can lead to losses, we’re going to discuss how over celebrating a win can create an emotional imbalance that triggers an equal and opposite (emotional) response.
I often liken this concept to sports, which is a great medium to use as most of you reading this are familiar with at least one sport.
When you go to watch your favorite team play in whatever sport you favor, do you cheer when they score?
Of course, you do! That’s a given. Otherwise, what’s the point of attending a game, right?
But here’s the catch. You can’t cheer on your favorite team when they score and not be disappointed when they give up a score. In the same way, you can’t celebrate when they win and not be disappointed when they lose.
As far as I’m concerned, that’s Newton’s third law of emotions at work. Remember, for every action (in our case a feeling); there is an equal and opposite reaction.
The same two emotional reactions while watching your favorite sports team also apply to your trading. You can’t celebrate a profit and not be disappointed with a loss.
So you see, even positive emotions while trading the Forex market are deceivably negative.
Just because emotions, whether positive or negative, can hinder your ability to see the market through a neutral lens does not mean you should attempt to rid yourself of all emotions of any kind.
In other words, don’t try to suppress every feeling or thought that bubbles up inside of you.
Not only is this a lost cause, but attempting to do so can do more harm than good.
Why is that, you ask?
Because those suppressed emotions are bound to come out eventually, and when they do, it won’t be pretty. You can’t completely contain something as natural as feelings, especially while trading the Forex market.
To make a comparison, think about the wings on a plane. They aren’t completely stiff because if they were, they would break in half at the first sign of turbulence.
Instead, they flex to some degree, which makes them stronger so they can withstand whatever the troposphere throws at them.
The same goes for bridges and high rises. The tallest buildings in the world sway from side to side on a windy day. This is not accidental. It’s by design, so the building doesn’t topple over during a strong storm.
So instead of trying to hold back all emotions while trading, let them flow. Just be sure to find and maintain an appropriate balance at all times.
You just booked $1,000 on a trade. But this wasn’t just any trade; it was a setup you had been waiting on for weeks.
The market pulled back right into a confluence of support, bullish price action formed and you pulled the trigger. Shortly after it reached your profit target while only causing minimal heartburn. It was the perfect trade.
So what did you do next?
Celebrate, of course! You danced on your desk, took your significant other out to a five-star restaurant, all the while bragging about your recent trade. Oh, and let’s not forget the Google searches for the latest Ferrari and Lamborghini models (because the world’s best trader shall not drive a Honda).
You wake up the next day feeling on top of the world, ready to continue beating on your craft and reel in another $1,000 profit. You open up your trading platform and to your horror, you find that the position you put on yesterday during your celebration is down more than $1,000.
You’ve lost all the profits you just made and then some.
The reality sets in that this Forex thing isn’t so easy after all. (Simple? Yes. Easy? No.)
Does any of that sound familiar?
Sure it does! Perhaps not the Ferrari and Lamborghini comment (I’ll assume you’re more of a McLaren fan). But we have all experienced that highest high just before the lowest low.
Of course, I phrased some of that in jest simply because I was there once too. I remember a few of my first (significant) winning trades and that feeling of exuberance that followed. I thought I was the best Forex trader in the world and had just stumbled upon my very own ATM.
And then reality set in because, well, it always does sooner or later.
But here is the real issue with the scenario above. Let’s pretend for a moment that the loss on the second trade ended up being $1,200. So between the first and second trade, you were $200 in the hole.
I think we can all agree that a $200 loss isn’t the end of the world, especially if you have an account worth a few thousand bucks. I’ll make that assumption given that the first trade was worth $1,000 in profit.
However, because you over celebrated the $1,000 win, that $200 net loss feels like a $2,000 net loss. The positive emotional build-up after the profitable trade caused you to have an equal and opposite reaction to the losing trade.
See how those unsuspecting positive feelings did you more harm than good?
If you had celebrated your $1,000 win without glorifying it, you would be in a much better place to handle the subsequent loss.
Think of emotions while trading Forex the same as walking across a balance beam that is 10 feet wide and sits 1,000 feet in the air. One edge of the beam represents positive feelings while the other represents negative feelings.
It’s your job as a Forex trader to stay as centered on that beam as humanly possible. It’s okay if you stray one or two feet from the middle, but you never want to find yourself within a foot of the edge. Otherwise, there’s a good chance you’ll fall off in the same way Forex traders emotionally implode.
And if you ever find yourself too close to the positive edge, the chances are that you’ll over-correct and find yourself hanging off the not-so-positive-side.
Knowing that even the most positive emotions can trigger an equal and opposite reaction when things go wrong is a huge step forward in your trading career.
By limiting your response following a positive outcome such as a winning trade, you reduce the severity of an emotional response following a negative event, thus allowing you to maintain a neutral and disciplined mindset at all times.
Always remember that becoming a successful Forex trader is not about preventing negative thoughts and feelings, it’s about controlling them. And just like everything else when it comes to trading, it isn’t about finding the best emotional balance, it’s about finding an emotional balance that works best for you.
What do you think about the relationship between positive and negative emotions while trading the Forex market?
Share your “feelings” below and I’ll be sure to respond.
Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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