For the subject of this week’s article, I thought that I would take the time to explore the thought process behind most trading decisions we make during our FX trading. I always drive home the importance of formulating and then following a detailed and actionable written trade plan, so as to remove any underlying emotions from the decision making process and thus enforce ongoing discipline in our trading activities. The less the trade becomes about us and more about our rules and plan, the more we have steered ourselves towards achieving success in the markets on a consistent basis. The plan tells us what to do, as opposed to us looking at a chart and guessing what we should do.
Controlling our emotions during our trading is perhaps the toughest obstacle we face in making our goals a reality. Every single time a candle on the charts moves up or down, we can be easily tempted to click the buy or sell button on a whim, without any real reason to be entering at all! In the early stages of my trading education, I remember reading that candlesticks and trend on a price chart are nothing more than simply a representation of people’s emotions when they buy and sell. Rising prices are an illustration of greed in the markets and when prices are falling, we are seeing the picture of fear taking over. Greed causes prices to rally and fear causes them to fall…or so they say. After teaching students worldwide with Online Trading Academy both in the classroom and during the ongoing virtual environment of our online graduate Extended Learning Track program and obviously through my own experiences as a trader for pushing eight years, I have started to look at the emotions of fear and greed in a slightly different light. Let me explain.
The difference between the way most retail traders think and act when they place trades and how some of the biggest banks and funds act when they trade, is hugely different. Think about this for a second: when a fund manager places an order to enter the market to take a position, do you think that they are worried about losing the trade and how it will make them feel? Or do you think that they find it easy to pull the trigger because firstly their superior has already given them their risk parameters and secondly because the money at risk is not actually theirs? To the fund manager, taking the trade is nothing more than their job and, like any other job, they need to get on with it on a daily basis.
On the other hand, let’s think about the retail trader sitting at home and taking the same trade but with a much smaller size. Even if they were taking the trade at the same time and in the same direction as the fund manager, do you think that there is a possibility that their thoughts may be a little different than the fund manager’s? For most retail traders I would say absolutely, and why might you ask? Well for a start the retail trader is trading with their own money, not somebody else’s money, which will automatically have a different dynamic in itself, meaning that whatever the outcome of the trade, it will directly impact the retail trader. Secondly, the retail trader has no guarantee of an income at the end of the month, unlike the fund manager or trader who works for an institution. This person will no doubt still earn at the end of the month as long as they follow their instructions and trade plan as outlined to them by their superiors.
I have come to understand that the completely different environments in which retail and institutional traders operate, dictate clearly the challenges that can be faced for most retail speculators out there. I do not believe that the emotions of fear and greed work the same way for the small trader, as they do with the larger trader. In fact, I would go as far as to suggest that greed does not even become a factor in the potential success of the retail trader because if you ask most people who want to trade for themselves what they want more than anything else in their trading, they will normally say, consistency. They just want to be able achieve their goals with low risk trades and slowly build upon this. It does not become about greed at all. It is the fear which tends to be the biggest challenge of all.
It is fear which stops us from taking a solid setup in the markets because we have been on a losing streak, only to see it work out well and the opportunity missed. It is fear which causes us to not follow the trading plan to the hilt and make irrational changes all the time because the odd trade fails to work. It is fear which causes us to get out of a trade far too early with a small profit because we are scared to hold on in case it becomes another loser and it is fear which makes us search over and over again for the perfect strategy which does not exist, simply because we think there is always something out there we are missing out on or don’t know about. Fear my friends, is the biggest hurdle any retail trader has to face and will hold you back more than anything else ever will. Recognize that fear needs to be controlled with a plan and discipline. Once the consistency comes, then the fears will subside over time. Oh, and for those of you who were wondering what I feel about greed’s place in the market, well that is an easy one. Just ask yourself a quick question: Why do people become greedy? Because they are fearful there will never be enough.
Written by Sam Evans, Online Trading Academy. After leaving University in 1999, Sam thrust himself into the media world, working as an executive producer and part-time presenter for London’s Capital FM. Roles in the record and film industry followed, where Sam conducted many promotional interviews and honed his presentation skills for nearly 7 years. With a strong desire to work for himself, Sam left the media industry behind and spent an intense 18 months studying to become a professional Life Coach, embarked on various property investments and gave in to his childhood fascination with the money markets by training to become a trader with Online Trading Academy. Since his graduation, he has been a full-time trader, specializing in Stock Index Futures and Forex. Under the guidance and mentorship of some of Online Trading Academy’s best instructors, Sam himself joined the teaching roster and forged his own unique style of trading. A devoted student of the Market, Sam’s focus is on strict risk management discipline, combined with a realistic approach to understanding the true nature of Price Action. Fueled by a passion for the markets, Sam now teaches and presents for Online Trading Academy, welcoming and helping others into the rewarding world of trading.