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The Importance of Disciplined Trading and Sound Risk Management



Forex trading isn’t just an analytical venture—it’s an investment path where emotions play a decisive role in performance. While most traders want to envision themselves as cool, calculating finance experts who set emotions aside and only make trading decisions based on cold, hard numbers, the reality is that even successful traders can fall prey to the impulses of their emotions.

These emotional impulses often pose a greater threat to trading strategies when traders lack awareness of these inclinations. When left unchecked, impulsive decisions and a lack of trading discipline can sabotage your risk management practices and put your trading strategy in a far more precarious position.

Don’t let unchecked emotions and undisciplined decisions derail your trading strategy. Use the following trading tips to place checks on your own emotions and manage your level of risk exposure.

Set Trading Rules for Yourself—and Never Break Them

An analytic approach to evaluating currency pairs and executing forex trades is always the best approach. Forex traders find sustained success by using the chart patterns, indicators, market news, and other variables that demonstrate sustained success in identifying profit potential on the forex market.

With experience, you should develop a set of rules or conditions that must be met before a position can be opened or closed. Once these rules are set, adhere to them in every trade you make—with no exceptions. When traders break away from these rules, it is often because they’re making impulsive decisions based on emotion.

If you think your trading strategy requires adjustment, that’s fine. Take a step back from trading and reevaluate your approach with a cool head. But never incorporate these changes on the fly. That’s a recipe for impulsive decisions that lead to swift, costly losses.

Don’t Over Invest on Any One Trade

A lack of discipline in forex trading often comes when traders are overcommitted to a single trade. 

When you stake a large position relative to the size of your investment portfolio on a single trade, you may be too dependent on the outcome of that trade. This not only weakens your risk management and risk exposure at that moment but may also lead to multiple poor trading decisions if that position doesn’t lead to a quick, tidy profit.

To avoid this scenario, most forex traders only use a small percentage of their available forex trading funds when opening any position. It’s typical for traders to cap the maximum size of any trade at about 1% of their investment account value. By keeping this investment figure low, you minimize the total risk you face with any single trade and make it easier to maintain a disciplined approach.

Pay Attention to Your Emotional Impulses

Emotions can threaten any trader’s judgment and performance, but the nature of these emotions can vary from one person to the next. For some traders, nervousness and fear of shrinking their investment holdings can lead to reactionary decisions based on a surprise loss.

In other cases, anger can spur impulsive trading that seeks to win back what it lost—especially in cases where traders are frustrated that their strong market analysis wasn’t rewarded with profit on a recent trade. As you gain experience in trading, you need to develop your awareness of the emotional impulses that can threaten your reasoned approach to trading and potentially lead you into costly trading mistakes.

Avoid ‘Get-Rich-Quick’ Schemes in Forex

When trades—or trading platforms—make promises that seem too good to be true, they usually are. While forex trading offers high earnings potential over a sustained period of time, traders can get themselves into trouble by chasing big earnings and expecting dramatic returns on their investments.

In practice, most traders never commit more than one percent of their funds to a given trade, ensuring they’re never overextended and at risk of significant losses off of a single trade. If brokers are promising massive overnight returns and quick wealth accumulation, consider this a red flag: Brokers should always be transparent about the risk involved in forex trading. Find a broker that will be honest with you and keep your expectations in perspective.

Never Base Your Trading Strategy on One Single Trade

In forex, it’s important to learn from your past experiences. In the same way you refine your strategy for identifying trades and timing your entry, traders will also learn about their own tendencies and impulses, and study their own behavior to learn how to better manage their emotions and expectations.

While applying these insights to your trading strategy is important, you should never make trades based on the outcome of a single trade. Trading strategy should be based on long-term trends, not a one-time event. If you’re reacting to a trade that didn’t go the way you planned—or, by contrast, a trade that delivered far beyond your expectations—your sample size is too small. 

In most cases, those insights are fool’s gold, and if you take them as the truth, you’re probably going to end up burned.

Play the Long Game with Your Trading Discipline

When you suffer a big trading loss—or find yourself struggling through a series of disappointing trades that shake confidence in your trading strategy—emotions can get the best of you. Instead of taking a more aggressive approach in hopes of chasing profits eluding you in those recent trades, take a step back and evaluate your trade history. 

Look for trends that might show a repeated oversight compromising your trading strategy or quick trading decisions where you let your feelings override your logic. By slowing down, taking a breath, and looking for answers in your performance data, you can fine-tune your trading approach and place checks and balances on yourself in hopes of solidifying your risk management and stabilizing your trading plan going forward.

Put your trading strategy to the test today. Sign up for a no-risk forex demo account.

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The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.