Too often, professional Forex and stock market strategists are questioned as to why they, themselves, do not trade.
“If you claim to know what is going to happen and how the market will move,” they say, “then why don’t you just trade with your own money and forget about holding down a job as an analyst?”
The answer to this question can be easily explained in two words: trading psychology.
One of the most important aspects to master when aspiring for success as a trader is the correct emotional approach.
Trading is so much more than the ability to analyze charts, keep up with geopolitical news and know your way around an indicator or two. It is a complex craft that takes constant studying, strategizing and most importantly, discipline.
Having the correct control and psychology is so essential to your success as a trader that, in order to provide unfiltered, unbiased and accurate analysis, market strategists need to attain a high level of discipline, detach themselves from their trading positions or remove the act of trading from the equation completely.
Confused? The idea is simple: the minute you put your trading strategy to the test and see your theories materialize before your own eyes, your objectivity is compromised.
Subconsciously, you can start to feel like your trade is an extension of yourself, a manifestation of everything you have learned. Your emotions start fluctuating as the market goes up and down, and with it, your ego will either expand, get bruised or just get in the way.
We can’t exactly measure the impact that achieving profits or suffering losses has on your psyche, and it undoubtedly affects each trader differently, but one thing is for sure: every decision you make will forever become clouded as soon as you have tasted victory or endured defeat.
A strategy that may have once been strong and accurate can suddenly become usurped by greed, sabotaged by fear or muddled with uncertainty.
Perhaps it might make it clearer to look at the structure of virtually any portfolio management firm.
Portfolio managers have the responsibility of creating an investment strategy that yields the highest profit return for their investors. This, as you can imagine, is a complicated feat and requires optimum efficiency in each step of the trading process. As such, investment management firms tend to divide up the work and delegate.
Generally, the analysts/strategists study the market and evaluate the effects of different opportunities. The risk managers then step in to help with trade diversification and sizing and finally, the traders implement the amended strategy on both their behalf as well as that of the investor.
Risk and portfolio managers will then receive updates from traders to help them respond to market variables as they occur.
The existence of this structure ensures that by keeping the strategists and risk managers detached from the actual execution of trades, the integrity of their methodology is left intact and by default, their likelihood to fail based on emotional entanglement is reduced.
So how can you use this information to improve your everyday trades if you don’t have a portfolio manager?
Well, you can become your own Investment Management Team.
1- Reduce your risk to the minimum by choosing a trade size that would survive your worst expectations.
2- Prepare for the worst – make sure that a predefined stop loss level is always a part of your trading plan.
3- Set clear targets, and use Take Profit orders to automate the process.
4- Place your trade and step away. Find something else to do – look for other opportunities or simply distract yourself with a movie. Whatever you do, don’t stare at the market watch.
5- Create a check-in schedule or set price alerts on your MT4 account. This will keep you informed without drawing you into an emotional vortex.
6- Be agile, what might have been valid at the time you planned your trade may not be valid after an NFP or ECB major release.
7- Never take it personally – your trade is neither a reflection of you nor a personal failure, it’s just the market’s feedback on your thought process. So be positive, learn from the feedback and adjust your trades accordingly.
Some traders choose to resort to other methods to help them bypass their emotions, including well-performing MT4 Expert Advisors, social forex trading or managed accounts. These alternatives, of course, don’t guarantee profits, but they essentially help protect you from yourself.
So, as you can see, detaching your feelings from your trading strategy is paramount to your success, and while external tools such as the above can be a great help, we must never stop working on our trading psychology and finding our own way to improve our approach to this complicated and risky craft.