For many traders, especially those who are novices, trading involves a string of significant and persistent responses to both successes and setbacks. While these emotional responses can be triggered by specific events or a series of events, the largescale impact they have on a trader’s psychology can often persist for significant periods with dire consequences for their trading behavior. Poorly regulated emotions can carry over to subsequent trading and risk, biasing subsequent trading behavior. Also, emotional cues that are generated by reactions to information relevant to the current trading conditions under time constraints can have a major impact on guiding attention and rapidly choosing an appropriate trading action.
Thus, in this market, success occurs when a trader possesses some characteristics. They have to be familiar with various skills, such as using technical indicators to their advantage, along with several months or years of experience in dealing with the currency market. Manual trading, which is the traditional way of trading currencies, involves the trader sitting in front of the computer of any other device and trade the currencies. This, however, requires the trader to block his/her emotions, especially those which hold the trader back from executing profitable trades.
What is emotional forex trading? Why it doesn’t help
Emotional forex trading refers to letting your emotions dictate your trading decisions. Decision making in this fashion can lead to suboptimal outcomes, creating frequent periods of inefficiency in the market. Perhaps the most dangerous emotions when it comes to trading are greed and fear. They are at times, the only driver in the market, eclipsing the importance of fundamentals and economics.
Those traders with experience can sometimes feel these extreme by the observation of those around them and also from watching price action. Greed and fear can also be the reason for creating feedback loops between price and news. This is due to the close relationship between news and price as news causes prices to move. Price moves cause new behavior as traders react to the price itself, rather than the news. As the prices decrease, other sellers are attracted to the market either willingly or unwillingly. Such feedback loops can be endogenous drivers of price action, driving markets in one direction for much longer than one would rationally expect. This inherently leads to overshooting. Forex rates are known for overshooting; no matter what time horizon is used.
How Does Greed Affect Forex Trading?
Greed can be the catalyst for traders losing their forex accounts. While it’s a fact that the forex market can be a lucrative opportunity to earn hefty profits in no time, it’s still important to understand that it can adversely impact your trading and force you to make ill-informed decisions.
Some of the common mistakes that novice traders commit due to greed are as follows.
- They can have unrealistic expectations of earning quick money
- They can over risk, which can lead to massive losses
- They can hold traders for a longer than needing a period of time in the hope that conditions the market will change
How Automated Trading Makes a Difference
The psychological part of currency trading is as hard as learning how to trade. Normally it is extremely difficult for a trader to steer clear of emotions when a trading position is in a serious downtrend. Fortunately, with the advancement of technology, forex traders do not have to rely on traditional manual trading. They can rather choose automated trading. Automated trading includes a range of software, platforms, expert advisors, and forex robots which prevents a trader’s emotions from getting in the way of the trader’s decisions. Many of these tools automatically execute trades based on certain pre-set rules.
Another advantage is that automated trading systems keep a trader’s emotions in check, thereby allowing them to easily stick to the trading plan. Since it automatically executes trades once the trade rules have been entered and met, traders do not have the opportunity to question the trade or hesitate while pulling the trigger. It also prevents a trader from over-trading.
Other Benefits of automated trading
Apart from preventing emotions from having an impact on trading decisions, the use of automated trading software such as forex robots and expert advisors provide some other major benefits as well. This includes the following.
Many automated trading systems allow users to use more than on trading account as well as multiple strategies at the same time. This inadvertently spreads the risk over various instruments while simultaneously creating a hedge against losing positions. This is because computerized programs can scan for trading opportunities across a range of markets in the blink of an eye, which is impossible to achieve in manual trading.
Order Entry Speed is Improved
Getting in and out of a trade in the forex market, just a few seconds earlier or later, can make a huge difference in the outcome of a trade. Since these computer programs can automatically and instantly react to changing market conditions, they are capable of generating orders as soon as the trading criterion is met. They generate orders automatically, including profit targets and protective stop losses.
Discipline is preserved
When using automated trading systems, trading rules are established beforehand and the trades are executed automatically. Thus, the discipline has persevered even in the most volatile market conditions. Automated trading ensures that the trading plan is followed to the last word. Additionally, pilot error is also reduced, as an order to buy 200 shares will not be incorrectly inputted as 2000 shares.
Automated trading has seen a growth in popularity especially in the last few years. There’s no doubt that the primary reason for using such automated trading tools is eliminating the effects of emotions. However, Forex robots provide traders with the opportunity to focus on other things such as market research rather than devoting all their time to making trading judgments. They increase the chances of delivering consistent profits, although there are a lot of other market factors involved.