Trading is Methodical - Markets are Emotional

DailyFX

Talking Points

  • Reasonable market expectations are a key to consistency
  • A trader’s method is often projected as the market being methodical
  • Learn to lose to become a better winner - trade in the smallest trade size possible

Over the next few days, we wanted to draw out some key concepts to help you manage expectations of the market to become disciplined with your forex trading.

The first part of this multi-part series is designed to remind you that trading is methodical and that markets are emotional. (If you wish to receive the follow up pieces and other forex education articles via email, click the subscribe button on Jeremy’s bio page.)

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Trading_is_Methodical_Markets_are_Emotional_body_Picture_1.png, Trading is Methodical - Markets are Emotional

It sounds simple and makes intuitive sense, yet too often many traders expect the opposite. As a result of expecting the opposite, we get roped into emotional situations that devastate our account equity.

For example, traders tend to get emotional because they think the market is methodical. Traders will have a methodical approach such as using trend lines to enter trades. Assuming this approach has worked reasonably well in the past, if the market moves against the position, the trader is surprised. There is a support trend line, the market HAS to bounce higher, yet it moved lower.

In essence, the trader has projected their methodical approach onto the market and begins to believe the market is methodical. When we believe the market is methodical, we rationalize the trend line break as a false break and hope prices return to a profitable level.

As you can see, the trader let their emotions into their trading by assuming the market was methodical. When the market doesn’t do what we expect, then we let poor trading techniques into our trading plan and account. Poor trading techniques such as adding to a losing position, using no stop loss, or widening a stop loss level are common mistakes emotional traders make.

What to Expect From Your Forex Account

As we place trades and orders in our account, remember that your strategy of when to place orders is THE method and do not want over emphasize each pip, trade, or market movement. Each trade is just one of a thousand insignificant trades. Trading is a game of 3 steps forward then 2 steps backward. When you expect perfection, you will be disappointed. Therefore, expect losing trades.

You may be wondering, how many losses are needed to become a better winner?

A common misconception is that a strategy’s success hinges on a high win ratio. That is simply not true. Some of the best strategies win only 40-50% of the time.

What is a good win ratio? There is no grand formula. It is not a one size fits all approach, but determine the strategy’s edge using the win ratio. Then confidently trade your method and let the market’s emotions determine the outcome of the trade.

Lastly, expect losses to be incurred and prepare for them through low leverage so the majority of your equity is preserved.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

Follow me on Twitter at @JWagnerFXTrader.To be added to Jeremy’s e-mail distribution list, click HERE, select “SUBSCRIBE” and enter in your email information.

See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.

Join the DailyFX team inside the DailyFX Plus Live Classroom for webinars on the psychology and emotions involved with trading. There are nearly 25 live webinars each week where you can ask your questions in real time. DailyFX Plus is freely available to all live FXCM account holders or for $19.99 per month.

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