Psychological Control: The Key to Forex Success

Trader A: “I have been trading for the last two years and started with demo accounts, things were going quite well and then I opened my real account. At the beginning everything was perfect but then started a series of little losses until I finally blew out my account. What happened? Well I think my main problem was that I did not respect the method I was using. This week I employed one strategy then every two weeks I changed systems. That insecurity caused me to make a lot of failed entries because I was confident on the outcome of my previous “experience”. Having had so much success on the demo so fast proved to be a negative asset as I thought things would be the same with real money on the line. And what happened was exactly the inverse. This frustrates me because sometimes I enter the market instinctively and most of the times I lose… at least this is what my equity says in the end…”

Trader B: “I have been trading a little more than a year on a real account but am not happy about my performance. I have lost big amounts of money because I was opening too many lots (more than what would be responsible) and in other opportunities because I have tried to desperately recover what was lost. I did an evaluation some time ago of my last 6 months of trading. I could have avoided to lose thousands of dollars if only I had been able to control these issues. Something weird happened: every time I experienced a huge loss, at the same time I opened another position trying desperately to recover what I had lost and after scrutinizing my records I could see that 90% of those second entries ended as losses, and very big losses. I would have saved a lot of money if only I didn’t re-enter the market at that point. I am certain that this happens to many others.”

Trader C: “I have been trading on real accounts since three years ago. I have had good months and bad months. But I won’t lie to you: I have never had a really complete good year. Along time I have been perfecting my techniques and knowledge of the markets but I still make mistakes that are not easy to take off my shoulders. When I am trading I hate to lose and end up trailing the stop in reverse in the worst case scenario. I am quite good at analysis, in fact I have a few certifications as technical analyst, and several times the market has proven me right but in many others it hasn’t, and the losses were immense. I once let a position run against me for nearly 300 pips and it blew off almost half of my accounts. It was very frustrating and painful. I manage third-party accounts and when you lose 20% of the capital it is very difficult to get back and recover.”

Trader D: “I’ve been trading on real for 8 months and my results are more or less satisfying. I found a method with 5 indicators (it gives me more confidence) and after a good back-testing I felt completely safe to use it; however, I often abuse the system by entering in many pairs at the same time, EUR/USD, GBP/USD or crosses that give a lot of pips. This way I can earn money much faster but in the end moving so many lots becomes complicated. Maybe I am watching too many currencies at all times and get excited and don’t want to miss the opportunities. Thing is that I see many people commenting that they get between 50 and 200 pips daily and this is amazing, so I ask myself: Why not me?”

Trader E: “I am a full-time trader since long ago and this is what I do all day long. I live off my trading. I cannot complain but I have been experiencing amazing periods with big profits followed by other very negative ones with huge losses. I haven’t managed to be consistent. I have been trading for almost 4 years and I have seen everything. I have been able to spot the mistakes in the road but sooner or later I stumble again on the same stones. In my case I usually omit to take the news into account when opening a position, and also making lots of trades to earn commissions. I know that many do the same, anyway those are small trades with little risk, but I cannot conceive one day without opening at least one or two trades on my accounts. If I don’t, there’s no income for me.”

To be successful in Forex you don’t need to be a Super Technical or Fundamental Analyst nor do you need to have years after years of practical experience and neither use a super strategy with 50 simultaneous indicators. Only a selected few among thousands of traders are successful in getting consistent results. Why is it so?

My opinion is that the key factor is the mastering of Psychological Control, which is the combination of 4 basic elements:

1. A Great Responsibility: Being responsible will allow you to be wrong many times while Keeling enough capital to stand back up easily. An irresponsible trader (who uses too many lots, doesn’t use stops or trades during the news) is condemned to have lesser opportunities for recovery and thus, many more frustrations. A responsible trader doesn’t try to be a millionaire in a week or a year, instead he or she Works towards daily goals, getting constant and consistent profits. The keyword here is: CONSISTENCY.

2. Trust in your Probabilistic Model: Trading correctly means to follow probabilities that have already been checked through back-testing or performing a thorough analysis of your strategy. If your method is good, then use it respecting all the rules and do not mix it up with other strategies. If you do not respect the method you will never be able to give an authorized assessment of its strategy. Research your own method as if you were a scientist, and remember that to be efficient you don’t need to add dozens of indicators to your system. Some people only use one or two and get excellent results. Having too many indicators can delay the decision making or response at the moment of placing a trade and you could be
   letting go a lot of profitable opportunities. Be practical and perform lots of back-test before using the method on a real account.

3. Being prepared for Everything and Anything: The market can take us out of a position at any time… this is normal and happens to everyone of us, it is common and we are all exposed to it. However, our mind must be prepared to accept this condition and live with it. You must be prepared, and also be able to trade without fear. Those fears usually make us get out too early from a position, with little or no profit at all, or lead us to break the rules of a given strategy.

4. Being able to apply Self-Criticism: Never be satisfied with your own way of Trading. Research your main failures and design techniques to correct them. Keep a record of all your mistakes. For example, a good way of avoiding revenge trading (trying desperately to recover after a loss) is to simply turn off your trading station and only keeping the charts on sight until there is a real good opportunity to enter the market and recover little by little. The market won’t go anywhere, it is always there and so are next profitable opportunities if only you are able to exert some patience and wait. There are many ways to fight your bad trading habits and you will only find them if you are able to question yourself. Keep a trading journal.

With this, I am not saying that Technical or Fundamental analysis are not important. But I do say that Psychological Control should be first and foremost. Managing your emotions is much harder to learn and apply. Try to do a thorough quantitative analysis of the main reasons behind your major losses. If you do this honestly you will see that most of them are caused by psychological issues that fit into one or more of the above basic elements. When you are able to identify the causes, you will have greater assets to achieve a successful Forex trading and minimize your former losses. Be humble and work on the causes to get a complete control of your mind and emotions.