The trading profession can add a lot of additional emotions and experiences to your life . Fear, along with other major emotions, hope and greed, drive the forex market. Due to the fear of losing money that affects everyone involved in forex trading, fear can be called the number one emotion in trading.
Generally speaking, the emotion of fear arose as a result of perceived threat and has evolved into a natural defense mechanism in most animals. In our heads, what is responsible for fear is the limbic system, which is one of the most primitive parts of the brain. Fear is one of the components of the self-preservation instinct in developed animals and manifests itself in the form of “fight or flight.” The same goes for humans.
Forex Traders’ Response to Manifestation of Fear
When trading, there are several types of emotional responses associated with fear:
– Fear to fail
– Fear of losing a potential profit
– Fear of losing everything; perdition.
The aforementioned fear-related emotions are reflected in the daily movement of the markets and often lead to losing trades if not properly controlled.
However, fear can be extremely useful in the event of market contingencies. As WD Gunn, one of the famous traders of the past, said, “Fear will save you if you act quickly when you realize you’ve made a mistake.”
Many professional traders admit that they use fear as a kind of sixth sense to get out of a position in time. This refers to situations where neither take-profit nor stop-loss has been triggered yet, but the trader feels that “something is wrong”. Other date de Gunn reflects well the above “Fear of the market is the beginning of the road to wisdom.”
How fear drives your trading
Having a good trading system and all the necessary technical and analytical tools is not enough to be successful in forex trading. A proper mental attitude is also needed. Which can only be achieved by learning to control their emotional reactions in all possible trading situations.
Most people have no way of knowing how they will react or what emotions they will show when they start trading. And they have no idea to what extent their Emotional reactions will affect your profitability.
Another emotional reaction that can negatively affect a forex trader is fear, which prevents him from doing anything, ie open or close positions. This can be especially detrimental if the trader, holding a losing position, finds himself paralyzed, unable to close a losing order while the market continues to move against him.
This type of reaction can also prevent the trader from opening a position when he is hesitant to “pull the trigger” and thus goes against his own trading plan and the rules of the system.
Another type of fear, which occurs during forex trading, usually occurs after the trader has closed a losing trade. Due to the loss of confidence in his system caused by a previous losing position, the forex trader may be too scared to re-enter the market, even fully aware of the possibility of recovering money lost on a previous trade.
How to use fear in forex trading
Basically, when it comes to fear, you have to keep in mind that fear refers almost exclusively to future events. It can take the form of prolonging an unacceptable situation (hanging onto losing orders), which can make the current situation even worse.
A good way to deal with fear constructively is to replace it with hope, which can be very detrimental to the trader. For example, instead of thinking, “I hope the market comes back,” you can replace this thought with a much more useful one: “I’m afraid of losing more money.” Caution in trading does not hurt. This thought substitution technique can be very helpful if you find it morally difficult to accept (and close) losing trades.
In general, if you can be disciplined and trade using a good strategy, with unquestioning application and adherence to a money management system, fear and other emotions can be easily curbed. As long as you “plan your trade and your trading plan”, fear can be minimized in their foreign exchange operations.