By: Terry Allen
You have probably heard many times that you must not let your emotions affect your Forex trading. You may have also come across advice recommending that you must develop a mindset that is impervious to outside stimuli. In other words, you should be able to trade like a robot with such a cold detachment that ice frequently droops from your eyebrows.
Is this really necessary or are all these suggestions just a load of baloney? This article is intended to show you the importance of keeping your emotions under a firm rein. For instance, if you have suffered a sequence of trading losses, then you will know what a traumatic experience this can be.
You will also appreciate how much effort it takes to restore your morale and psychology in order to launch yourself back into the Forex fray. One negative impact that can result from such events is that you start to snatch at profits instead of letting them run their full course.
Under such circumstances, you will find that your trading performance will deteriorate resulting in declines in your profits. If you have designed a trading strategy, then you should have assessed its performance by determining its expectancy value.
You can perform this task by using the following formula:
Expectancy Value = (%W X A_Win) - (%L X A_Loss)
A_Win = average win
A_Loss = average loss
%W = winning percentage
%L = losing percentage
Imagine that you have performed extensive testing by stimulating live conditions as closely as possible and have recorded the following values.
A_Win = $6.75; A_Loss = $1.90; %W = 40% and %L = 60%
Consequently, the expectancy value of your strategy is $1.56, which means that you should achieve a profit of $1.56 for every dollar you risk over the long haul.
The important point is that you must now live trade your strategy in exactly the same way you did during the testing stage and especially without human interference.
However, you may become heady with adrenaline once you go live or you may begin to snatch at your profits as already discussed. Imagine that such actions affect your trading producing a reduced average win figure of $3.50. Consequently, your new expectancy value will have dropped to $0.26 meaning that you can only expert to gain a profit of $0.26 for every dollar risked over the long haul.
As you can gather, such a collapse in your trading performance can have a demoralizing effect on you. This is because you will now have to expend significant amounts of your energy performing numerous trades just to rake in a minuscule profit.
If you discover yourself in this boat, then you must understand that the root cause of this problem is that you are not controlling your emotions. You should attempt to overcome this difficulty by reverting back to demo trading. You should trade you strategy until such times that you have acquired utter confidence in its performance and conquered your urges to interfere.