My first car was a Mercury Capri. Though not overly expensive, it was not what I had planned to buy. I had planned on something relatively cheaper but once I went into the showroom everything changed.

I saw that green Capri and the salesman saw my glance and worked it to full advantage. Fortunately, I had very happy moments with that car in the 4 years I had it and I don’t regret having purchased it.

But that is not how it always goes with such impulsive purchase decisions made based on emotions, especially in foreign currency trading.

Additionally, when I bought the Mercury Capri it was brand new and of course the price was much higher than what I got it for. Would you buy foreign currency at a high price, hold it for 4 years and sell it at a lower price?

This is just a good, practical example of why forex trading requires a much different approach compared to other trades in your life.

Here are a few reasons why trading on emotions will kill your forex trading profits and even wipe out your entire forex investment.

Makes You Forget Effective Money Management

You see your price charts showing some unusual activity and your heart rate starts throbbing.

This is an opportunity to recoup all those losses you went through last week. Your instincts tell you that the current price trends will result in gaining high pips in a very short period of time.

So what do you do? You forget all that talk about checking risk-reward ratios. You feel that if you enter this trade with only 2% of your total investment you will be letting an exceptionally good opportunity pass you by. So you put in almost all your cash in this trade.

You want big profits, isn’t that the aim for all businesses? Then you realize your broker can help you make even larger profits so you take on a 400:1 leverage on the trade.

Well, if that particular trade goes well and you have gained a good number of pips by the time you are exiting the trade, then good for you.

However, the scenario that plays out if the price movement reverses will not be pretty. You have not only wiped out your whole account but you are also in debt for four times what you invested.

Greed took over and proper money management techniques went out the window.

Makes You Ignore Effects of Spread Fluctuations

Forex brokers do not charge commissions. Instead, they rely on the difference between currency bid prices and ask prices, which is known as the spread.

The spread directly affects how profitable your trades will be and as a trader you should be aware that these spreads fluctuate wildly during forex market trading hours.

During forex off-market hours, trade volumes are lower, market liquidity is lower, and these lead to wider forex spreads. The same happens when there are anticipated news events likely to affect currency prices.

When you are trading on gut instincts and emotions, you are very likely to forget to calculate the spreads you are facing and the likely effects it will have on your profitability. Higher spreads will mean lower profits.

Makes One Hold Losing Positions For Too Long

You enter into a trade predicting a positive price movement and for a while it goes as planned. Then all of a sudden the price movement reverses in the opposite direction.

You stay calm as required knowing that prices fluctuate. But then it approaches the stop-loss level and you feel the market will still turn to your favor.

So you shift the stop level lower, and then lower, and then you remove it altogether. The result is a much higher profit than you had initially planned for.

Trading on hope will result in losses that are difficult to recover from.

Makes You Hold Too Many Open Trades

There is some interesting action on the EURUSD so you put in a trade. Meanwhile, your friend has been making substantial profits on the USDCHF, so you go in for a piece of the action.

The Australian interest rates are raised and you feel you can make a killing before the excitement dies down, and once again you enter a trade.

All these happen while you are still maintaining your trades on your currency pair of choice, the USDJPY. Holding too many trades due to greed will cause confusion and is a recipe for disaster.

Makes You Take Out Excessive Leverage

Currency trends are going just as you predicted and you feel this is an opportunity to make a killing so you take on high leverage. Greed will make you lose focus and cause you losses.

Makes You Forget Stop-Loss and Take Profit Instructions

There are moments when all the conditions you want in the perfect trade are fulfilled and you want to take advantage of that.

You figure this is a sure thing so why limit yourself by putting take profit levels? Why bother with a stop loss when you feel a temporary fluctuation will stop you from harvesting great profits?

This is greed and it will be the cause of your forex trading ruin.

Makes You Have Unreasonable Expectations

You have read the reviews and seen your old high school buddy make millions in forex trade yet he never even went to college like you did.

You tell yourself trading in the currency market is like taking candy from a baby. So you withdraw your life savings, take out an extra mortgage, liquidate your kid’s college fund, and start currency trading online.

Good luck buddy, you will need it. Such an attitude is borne of greed and arrogance and is 95% likely to fail.

How to Separate Emotions from Forex Trades To Protect Your Investments

Human beings are emotional beings and that is not a bad thing at all. However, in forex trading you have to keep your emotions at bay.

This is a difficult thing to do even for the best of us. However, even the most emotional of us all can take these four actions and limit the effects of emotions on their trades.

1. Count Down

Your emotional impulses will blind you and make you lose focus. When the adrenalin pumps in on seeing some exciting price action or forex signal, count slowly from ten downwards to calm yourself then analyze the trade with a clearer mind.

2. Keep a Journal

The best way to learn from your mistakes and avoid future ones is by keeping a record of all your trades and revising them regularly.

When you see the negative consequences of your previous actions you are unlikely to succumb to emotions again.

3. Stick To Plan

The first lesson you will learn from your mentor or even from experience is to formulate a profitable currency trading strategy and implement it.

Follow your plan with each trade and you will be sure to make long term profits.

Photo credit: @Doug88888