Forex Trading – The Fear Factor
Posted in Forex Trading on 22. May, 2011
Posted By EightNine On 22nd May 2011
When it comes to forex trading the fear factor is usually the single biggest reason why people will fail. The problem is that they are afraid of having a losing trade. This is not something that you can afford to do if you are going to be trading forex. You are going to have losing trades, you have to make sure that you understand that right from the start and make sure that you can live with that. Even the best traders get it wrong about half the time so there is no reason to think that you will do any better.
Since all forex traders are going to have losing trades the key to success is how you deal with those bad trades. It is entirely possible to make money even if you are wrong more often than you are right. What you have to do is to maximize your profits when you are right and minimize your losses when you are wrong. Unfortunately the fear factor causes a lot of people to fail in this regard. Their fear of losing money leads to them actually losing even more money, something that obviously should be avoided.
There are basically two ways that the fear factor can cost you money when trading forex. The first is that the trade will make a small move against you and you will panic and sell and take the small loss. While there are times when this may be a good idea it usually isn’t. It is quite common for a currency to decline in value slightly before heading up, if you are constantly closing your position on the decline you are also missing the upside and that you usually leads to a long series of small losses until you run out of money.
The other way that the fear factor can cost you money is that you may be afraid to close out a position and take a loss. In this case the trade goes against you and rather than selling you continue to hold on hoping that it will eventually go up and you won’t have to sell at a loss. In this case you run the risk of suffering very large losses when you are wrong. This can wipe you out very quickly if you are not careful so this is something that you absolutely have to avoid.
Obviously there is a little bit of a contradiction between the two scenarios above, you don’t want to panic and sell too quickly but at the same time you can’t afford to hold on to a losing trade for too long. The key is to come up with a plan before you make the trade, if it goes down by a certain amount you will then close out your position. This should help you to overcome the fear factor and make good decisions. The only problem then is that you have to be able to actually carry out your plan.
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