There’s a time and a place for going with your gut instinct. Deciding on whether to accept a marriage proposal is a good one. Placing a forex trade is definitely not. Yet this is one of the most common reasons for losing money on any market. You get excited by the possibility of making a whole heap of money quickly – and this excitement over-rules any risk-management strategy you might have in place. If it comes off – you’ll get an incredible rush, but if it doesn’t – and the chances of this are better-than-average – you’ll suffer a punishing loss.
The trouble with going with your gut is – it’s not a very reliable analytical tool when it comes to the markets. It responds to a whole host of variables – wishful thinking, the number of winning trades you’ve had that day, or even the amount of coffee you’ve had that day – that aren’t really that useful to observe when evaluating a trade. Basically, the power of your emotions can be so misleading in a trading environment that it is better to exclude them altogether.
Sounds easy, right? Well, it would be if you had some kind of switch on your person to turn them off, and that may yet happen in our lifetime. But until that day comes, you’re going to have to employ a range of techniques for cutting out your emotions when you place trades. The key to success with any of them is discipline. What you need to do is define a set of rules that will prevent you from making impulsive decisions – and stick to them.
Setting out a clear money management strategy is one side of this coin, but you also need to have an awareness of your own trading behaviour. You need to be able to look at yourself objectively, and that’s where a trading journal can help. Keeping a record of the parameters of each trade can help you to evaluate where things went right – and where they went wrong. You can then use this data to experiment with different trading styles until you find one that works. It can also help to video-record your trading sessions using screen-capture software, as this will enable you to replay your trading activities with the benefit of hindsight.