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Posted on Jan 27, 2015 at 09:02 PM
Until you learn to overcome them, Fear, Greed and False hope can put the trader completely out of business
After going to the trouble of developing and implementing a trading plan, why would a forex trader ever begin breaking their own trading rules?
Losing discipline with your rules can often lead to a disasterous trading . This can put the trader completely out of business regardless of their previous trading success and experience.
One of the pitfalls of not having a trading strategy or ignoring a well-developed one is following your emotions when making trades. Fear, along with greed and hope are the main trading emotions that make the forex market move
The emotion of fear arises from a perceived threat and developed as a natural defense mechanism in most animals. The limbic brain, which makes up the most primitive and reptilian part of the brain, controls fear which originally took the form of the "fight or flight" self-preservation response characteristic in all higher animals.
While losing money is the apparent cause for fear, the root cause is a fear of poverty; no one wants to be poor. The fear of poverty is another deep-seated fear that society has programmed into its members and directly affects the trading community.
The emotion of greed is common throughout the forex market, and it basically is the excessive desire for more than you need.
In many cases, greed can manifest in the common trading errors of overtrading and running winning trades into losers.
Greed can also cause a person to stay in a losing position beyond the time when an objective trading strategy would call for an exit. This obviously results in a larger loss which then ultimately exhausts your capital.
Most people do not have any idea of how greedy they really are until after they start trading. Having a clear profit taking component of your trading plan can help overcome this emotional obstacle to success.
False Hope can be one of the most damaging market emotions to a forex trader's success because false hope can coddle a forex trader into holding onto a losing position in the hopes that the market will come back.
The market has already proven the trader wrong, but hope makes them stick with the losing trade, often leading to disastrous results for their trading portfolio.
In fact, the hopeful trader would be far more reasonable in fearing losing more money on a losing trade.
Nevertheless, hope can be used constructively by traders when they hope to make more money on a winning trade and therefore let their profits run on.
While eliminating the emotional element in trading is unlikely, the way emotional and character elements have been minimized by seasoned professionals, is by education, confidence and a trading plan.
Being well educated, having Confidence in trading makes up a large part of a successful trader's attributes. Nevertheless, in order to be completely confident, a profitable trading plan which allows the trader a framework to trade upon, is a must have.
The trader needs to strictly adhere to the trading parameters of a concise, complete and well-tested trading plan. Any such plan should contain a risk-management component and be relatively easy to follow and implement in practice.