THE IMPORTANCE OF EMOTIONAL INTELLIGENCE IN FOREX
Chris Svorcik is the lead educational strategist for Admiral Markets. With over a decade’s worth of experience in Forex, he has helped thousands of retail traders develop strategies which deliver strong and consistent returns. To celebrate Admiral Markets’ first UK birthday, Chris shares his thoughts on the importance of emotional intelligence in a trader’s first year.
As most traders know, achieving long-term profitability through Forex trading is no easy feat. Within their first year, many novice retail traders struggle to make the kind of returns that they originally intended. In some cases, individuals can even lose money. This is something I have seen many times, and it’s a shame, because this can often lead to individuals becoming overwhelmed with disappointment and giving up on their Forex journey before it has really started.
But I’ve also seen many examples of traders who have achieved amazing results within their first year of being active. I’m here to say that you can be one of those examples too. But there’s one concept that is central to achieving early success: mastering emotional intelligence.
Forex trading requires the correct state of mind
Trading is a mind game and requires an individual to manage their emotions effectively. A professional trader must accept that Forex will take them on an emotional rollercoaster.
There will be times when a trading strategy will seem invincible, returning a rapid rate of pips. In these moments, trader can become over-confident and risk more of their capital. On the other hand, when a trading strategy seems to be falling short, it can become difficult to stick with it and see it through.
So the ability to keep emotions in check is absolutely vital. Novice retail traders need to approach their trades with professionalism, and that can’t happen unless our minds are clear.
Handling emotions can be tricky in the heat of the moment. However, this is a skill that can be practiced. Simply becoming self-aware is a powerful way of improving emotional reactions. Here are some of the most common emotional challenges novice traders are likely to encounter in their early months of activity.
1. Choosing the path of least resistance
Most traders adopt a single trading strategy within their first year. This is sensible, as it gives traders adequate time to master the steps of the strategy. The difficulty comes when traders are faced with the emotion of fear or anxiety.
These emotions are entirely normal when trades don’t turn out as originally anticipated. However, they become very dangerous to a trader when they are left unchecked. It can significantly hamper progress and cause a trader to break the rules of their chosen strategy when faced with pressure.
This is why it’s important to choose a trading strategy that matches your personality type, market outlook and appetite for risk. You could call it choosing the path of least resistance.
Every trading strategy has its plus points and limitations. Before implementing a strategy, traders must ensure that they have the ability to see its steps through, even when those limitations are in play. Abandoning a strategy halfway through is a sure-fire way of losing pips and damaging confidence.
The time to change a trading strategy is when you have stuck with it for a period of time and are faced with hard evidence that suggests some adjustment is needed. This is what the smartest traders do. They stay fully committed to their original plan of attack, before making any rash decisions in the face of self-doubt.
2. Recent history does not dictate the future
Past experiences can also play a pivotal role in influencing the emotions of inexperienced traders. This is sometimes referred to as ‘recency bias’ by Forex traders. Quite simply, it means that a trader has lost perspective on their chosen trading strategy due to their most recent results.
For example, a trader may have lost pips on their most recent trade after experiencing a winning run of four. Despite the strategy delivering a much higher percentage of winning trades than losing ones, the most recent negative experience can cause them to feel self-doubt about their trading performance. Some traders will react to those feelings by altering their strategy unnecessarily.
These instances are classic cases of negative emotions skewing the reality of what is actually happening. It’s not just exclusive to Forex traders too, most professionals will have had moments when one bad moment disproportionately outweighs a number of good ones.
So it’s important for first year traders to remember that history does not dictate the future. Remember, traders who look at their trading performances in batches tend to make better decisions than those who judge strategy on a trade-by-trade basis.
Keep checking in with your mental habits
My last piece of advice to traders embarking upon their first year of trading is to regularly check what mental habits affect their performance. Emotions are a natural phenomenon that can appear out of nowhere, so it can be difficult to stop a particular trail of thought.
But by practicing self-awareness, novice traders can transform the way they think for the better. This will lead to improved decisions when placing trades and increases the chances of success.