The Ultimate Guide on Forex Trading Psychology

The psychology of Forex trading has a lot to do with how the market moves. The anxiety in trading happens when most people fail or think they will fail at trading. These emotions will lead to a continuous stream of failed trading attempts that will cause a bigger psychological toll on someone’s mental health.

What is Forex trading psychology? It is the skill to control your mental state and emotions while trading. It consists of the following actions:

  • Planning and Commitment
  • Acknowledging that you will win some and lose some
  • Taking a break when you need to

The Forex trading market can bring out emotions in any trader. Learning how to handle these emotions will give you a good feeling and make you want to continue doing so. Not letting the psychology of Forex trading ruin your mental health can make you a better trader and stop with the unnecessary mistakes. 

Table of Contents

How Can I Control My Forex Emotions?

Being confident at Forex trading comes with time. A novice trader will experience the highs and lows of the market and so will their emotions. This takes perseverance and in time you will see that this may not help how you win or lose, but it will you with gaining more control for long-term success.

Forex Trading for a Living desk

There are steps you should take to make sure these emotions do not rear their ugly head.

1. Win Some, Lose Some

The psychology of your wins and losses with trading affects how you trade. There are times where you will have a big profit and then there are times when you lose. 

You must realize that all of this is a part of trading. Create a buffer with enough money so that if you lose, there is enough cushion to not take a huge effect over you.

If you cannot put a buffer in there, do not trade with money you don’t want to part with. Winning comes just as easily as losing and the key is to just take it all in stride and continue trading with a level head.

After winning a number of times consecutively, you may want to consider taking a break. Again, overtrading can take an emotional toll if you start a downward spiral and begin to lose your profits.

2. Take a Walk

Give yourself a breather after each trade. Walking away from time to time can give yourself a clear head on your emotions and what steps you need to take next. 

Read a book to get your mind off of things. Possibly reading books on trading at the time of your break will give you new ideas to try when you return to your trading session. Save those ideas for the next time you trade so that you can put them into your Forex plan.

3. Commitment and Planning

Work to control your emotions when something does not go your way. Overtrading is a great way to bring out the most volatile emotions to the forefront. 

To better control your emotions, write down your trading rules and develop a trading plan. When you have developed a plan and you have your own trading rules, you’ll want to stick to them. 

Learning how to manage these emotions and develop your trading psychology has the means to push your trading career further.

How Do You Develop a Trading Psychology?

Forex Positive

The trading scene can bring a range of emotions out of someone. Thinking you are up after five wins and then you lose it all and more after one trade can negatively affect your mind and how you trade. 

1. Positive Mindset

Walk into your trading session with a positive attitude. Know that you have made progress in studying the market and taking in any advice that you can receive. 

Know that this game is not personal and try to remove any emotions that may make you feel like it is. This will allow your mindset to be in the right place when you trade.

2. Picture Yourself Winning and Losing

Stabilize your mind. Let yourself know that there are two sides to every coin. In this case, it is winning and losing your profits.

Imagine that you are on a roll. You are continuously looking for the right setups and all is good accordingly and in your favor. The law of attraction can help with this as visualization is one key to putting your mind in a positive state.

Seeing yourself losing will remind you that there are no real winners in the trading business. There is no one that can beat the entire system and you are not excluded. So, when something goes wrong and you lose your profits, know that it is a part of the process. 

3. Practice

Practice makes perfect; and when you trade it is no different. Over time if you are logging how you are trading and what your wins and losses are you will begin to see a pattern and learn from it.

Practicing will build up your patience and give you time to form new plans if you need to. Even if you have done everything right and it looks like the trade is going to be in your favor, it could go left. If this happens know that this is where your discipline will kick in.

What are the Different Emotions in Forex Trading?

Every possible emotion that you can think of at the time of trading could rear its head. The main emotions of Forex trading are:

1. Fear

Once you’ve set your plan into place, don’t let fear take hold. Fear makes you doubt yourself and second guess your trading rules. If you think you should not trade, because fear has already set in, trust your gut and remove yourself from the trading floor.


If you are on a consecutive winning streak and you are well past your profit margins, it now turns to greed. Know when to back away and recoup. Trading could turn sour and your winning streak will not last forever. 

Even if you have a plan, be aware that greed can pop up at any moment. You made a plan just for times like this and this time is when you need to truly stick with it.

3. Revenge

When you are up in your trade wins and then a swift knock comes and pulls you down after two trades, you want to continue trading. This can lead to the revenge emotion when you lose, and you will want to quickly come back and trade again. 

It could also lead to anger and a clouded head, which could make you deviate from your plan. Usually, when this happens it is time for you to take a step back

4. Euphoria

The feeling of winning is something everyone wants to feel all the time. However, if this gets to your head you will think that every trade you go into will be an automatic win. 

After several wins do not let it go to your head. Stay humble and when you go to the next trade use your checklist and stick to the plan.

How Do You Make a Forex Plan?

The amount of trading in a single day equates to more than $5 trillion a day which makes it the largest market in the world. U.S. banks themselves have a hold over the bigger share of the Forex market. Along with the banks, the U.S. dollar takes up 85% of that $5 trillion a day.

Knowing this basic information will let you know that you cannot beat the entirety of this Forex market. Although what you can do is develop a plan that will gain you a profitable outcome. Structure and create goals for the amount of money you want to make. Having a strategy will help you keep your emotions in check and plan for every scenario.

Forex trading plans should include the following steps:

1.Determine How Many Days You Trade   

Knowing when you are going to trade will help you to better understand those days that you are trading on. Most people trade by the:

  • Day
  • Week
  • Month

2. Research

Your plan has to be researched well and to educate yourself on what is needed. This will give you an understanding of the market and your trading plan. This can help you plan better strategies and note what does and does not work.

3. Journal

Use a Forex trading journal calculator, so that you can log your trades all the time. If you use this, in the beginning, it can help you adjust your plans and show how you won or lost a trade.

Keeping this nearby will help you learn about your performance over a long period of time. Your journal should include the following entries:

  • Entry Date: The date you entered the trade.
  • Security/FX pair: A currency pair that is traded or gold and silver.
  • Entry B/S: Write down if you bought or sold and the level or price you entered the trade at.
  • Planned Stop and Target: This will let you know when to stop and what your target area is. This should already be determined before you go into the trade.
  • Possible $ Risk: Money that you could lose.
  • Possible $ Reward: Money that you could win on a trade.
  • Position Size (Lots): Your own position size in the trade.
  • Exit Price: The amount of money you left the trade with.
  • Pips +/-: The number of pips you attained or lost.
  • Total P/L: The amount of money you gained or lost.
  • Planned R: R: The ratio you wanted on the trade.
  • Actual R: R: The actual risk ratio it ended with.
  • Exit Date: When the trade closed.
  • Setup: Question yourself on why you started this trade and the actual setup of the trade.

4. Checklist

Have a routine that you follow in your plans. This should have things that include warnings on what to look for before you begin a trade. Your trading plan can be turned into a checklist at this point so that it is easier to follow.

5. Anticipation

Strategically make different plans so that you are semi-prepared for what could happen. All of your pre-planning should be done before you trade because this allows for your mental state to be calmer.

6. Patience

Everything on your checklist should be checked off. If not, this should be a warning to you to step back. Wait until you see a target that is worth checking off your list.

Waiting for that “perfect” price on a trade setup is possible. Those who tend not to wait will lose money because they did not take the time to check everything that aligns with their plan.

With all of these steps in place to create a plan, what are the steps that need to be taken to reduce risks?

How Do You Manage Risk in Forex Trading?

There are lots of factors in the trade that will see what your gains and losses are. Working to train your eye in seeing an ideal setup will help to eliminate dangerous risks.

1. Be Careful with Leverage

Having a leveraged account while you are trading allows you to have a larger position than with an unleveraged account. There are some brokers that will offer you high leverage. You should be careful when taking this deal. If you are new to the Forex trading scene then you will use up most of that leverage.

You should think of leverage as a way to control your debt or how much debt you could take on.

There are three types of leverages:

  • Effective Leverage: This is the amount of the total position size or lot that a person has actual control over with the whole amount that they gave to their broker as a margin.
  • Available Leverage: The amount of leverage that the trader still has available even with their different trading positions and their broker’s highest amount of leverage.
  • Maximum Leverage: The highest position size that a trader can have with a certain margin that was given to their broker.

2. Check different Pairs

Trading in the Forex market means that currencies are traded with a broker or a dealer and in pairs. There are pairs that are called the “majors”. They include:

  • EUR/USD: Eurozone and United States
  • USD/JYP: United States and Japan
  • GBP/USD: United Kingdom and United States
  • USD/CHF: United States and Switzerland
  • USD/CAD: United States and Canada
  • AUD/USD: Australia and United States
  • NZD/USD: New Zealand and United States

Start trading with different currency pairs to minimize risks. The condition of the market may not have the setup you want, and your patience has the potential to run thin which will lead to you trading wrongly. 

Using more pairs comes in handy when the odds are not in your favor. The time of day in which you trade may have an effect on how your pairs are being favored.

Be careful in watching too many pairs as again your patience may not wait for the pair that you are centered on.

3. Study the Market

Studying the market will sharpen your skills as a trader and will help you to adjust your plans and strategies. Learn the language and charts to anticipate setups that are a risk.

When you do technical analysis, you will be studying past price movements and currency pairs. Use this method to see if there is a certain pattern that the market is following at the time. Look at those around you for guidance. Network or ask someone to be your mentor and pay close attention to what they do and how they do it. See what yields results and what does not.

There are always announcements on the market either made by politicians or the news. Fiscal policies are always changing, and you have to analyze all of them. Take advantage of any training available and know when to apply what you have learned.

As you continue to study the market you will learn quickly that there are tips that are given by other traders. Your emotions will play a big part in whether or not you act on this tip. Use your judgment, as these tips could be a way to throw you off your game. They could also be a rumor.

Surprise announcements, however, can cause a volatile environment. When policies are changing, that affects many markets including the Forex market.

4. Hedging

Hedging in the Forex market happens when the trader buys or sells currency at a certain price point or two to help ease the risk of losing it all. If you are not sure how the market will turn out, you can go the hedging route to protect your assets. 

To avoid jumping into illegal territory, do not hedge on the same currency pair. In the US, The CFTC has instructed brokers and dealers to implement OCO (One Cancels Other) that stops any trader from doing so.

5. Higher Time Frames

Know when to back away, not doing so can lead to overtrading. Look for trades that last a long time. Higher timeframes come with chart patterns and resistance levels that are truer than the shorter timeframes. This leads to a bigger success rate and it will help you make more money in the long run

Having a higher time frame will help keep your transaction costs low. Most high time frames are 4 hours and above. This establishes patience and develops your trading skills because trading is a long-term game.

When you have a shorter time frame you may feel the need to continue trading and risking more money. Going with a shorter time frame leads to inaccuracies in the trade setup. Lower time frame charts are usually seen as “noise”.

Since lower time frames are considered noise, they help with price movements. These daily time frames cause the prices on trades to move abruptly and this makes traders want to pounce on the trade. They consist of mostly minute charts and want a higher trading fee to begin.

6. Stop Loss

Some professional traders have their stop losses in their heads, but if you are new to trading you should consider writing it down in your Forex journal.

A hard stop loss will be implemented into the trade and the trader has no choice but to follow and exit the trade. A mental stop loss requires discipline and a trader can still continue to trade if they choose.

The problem with this is that it could lead to you overtrading. Trying to keep yourself in the game has a psychological toll on your mental state that makes you think things will get better on that trade when they will not.

Use the hard stop to keep your head in the game if you have not yet gathered enough discipline to continue sticking to your plan. If there is a shift in the market, see that as an opportunity to evaluate when you need to stop.

7. Reasonable Goals

Everyone wants to win all the time, but there are downfalls. Setting up pre-determined goals and side notes of when to stay and when to go will help your mental health.

This is where your time at studying the market comes into play. Check up on what has happened in the past to determine how far off your goals are.

Trading is unpredictable and that can yield results you may not want to see. Know when and when not to trade and do not push the issue if you just want to hurry and make your goal. Setting a reasonable goal will give you a confidence boost. 

Now that you are able to begin looking at the signs of risks, how can you become more disciplined in trading?

How Can I Be Disciplined in Trading?

In order to be disciplined, have a positive attitude about trading. Developing your patience trade after trade will give you the upper hand in the long run. Practice patience when you win and lose. Remember this is your money and you have to exercise restraint at times.

Plans Are Made for a Reason

Stick to your plans and strategies that you have taken the time out to write. If your plans do not work at the time of trading, do not throw them away and jump into trading with no plan. Reevaluate your plans and attack with the new plans next time. This shows that you are not a trader that goes wherever their emotions push them to go.

Establish Trading Rules

Give yourself rules to follow that establishes what you need to do as a trader in this market. These rules include:

  • Knowing when to enter and exit a trade
  • Sticking with the time of day that you need to trade
  • Whether you want to stick to a lower or higher time frame
  • Staying away from volatile trading periods to take a breather

You should have these rules to help build your discipline in trading. If you stop following these rules you may feel guilty and wish to return to them. Even though the progress to true discipline may be slow, it is still progress.

Push Away Negative Thoughts

Imagining that you are losing is not a negative thought. It begins to turn negative when you are constantly picturing yourself losing. Know that you have done everything you can to prepare yourself to trade and realize that you will win and lose. 

The more you know that there are risks and that these risks should not make you fearful or revenge-seeking to “get your money back”, the more you’ll understand yourself. This should lead you to fight harder and do your research.

The longer you practice and are exposed to these risks, the more your confidence should build. You’ll learn how to handle trading on any given day with any amount of losses or wins.

What are you waiting for?


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Muhammad Awais

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