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Saturday, January 22, 2022

How to Keep Your Cool When Trading Forex

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Those with a nervous disposition are advised to stay away from the trading desk of a forex trader. Forex trading is a demanding and sometimes stressful activity. Particularly when things go wrong. 

Traders who earn six or even seven-figure sums from the financial markets don’t do so on the back of never-ending wins. They simply manage to win more than they lose. They exercise risk management and allocate their risk capital to trades in a measured way that should ensure that their wins provide them with greater upside than the downside of their losses.  

It isn’t unknown for traders to make losing trades in alarming succession. And in their panic, they can make simple blunders that further prolong their financial distress. 

After all, if their margin of safety is only 3%, then it only takes a small deterioration in performance for an average trading profit to slip into the loss-making territory. In this article, we will discuss one key way for forex traders to keep their cool when trading. That tip is employing automation wherever possible. 

Utilise forex robots to automate decision-making

Forex robots are a love-hate topic within the Forex trading world. Quantitative traders, known as ‘quants’ for short, build algorithms that produce trading signals or even execute trades on the traders’ behalf, according to a strict trading strategy. 

It takes technical expertise and a high level of intelligence to build a profitable forex bot, which is why top-flight universities around the world and even tech firms have seen their top performers poached by quant hedge funds looking for the best and brightest to train their software. 

Other forex traders prefer a more analogue approach. The idea of their risk capital being autonomously invested by something without a brain creates anxiety. 

To take advantage of the swift signals of an algorithm but retain control over their capital, some traders use a forex bot to propose a trade. As a second step, the trader applies their own judgement before manually placing a trade on a desktop trading platform.

Due to the human input, this approach is quite incompatible with high-frequency trading – the trading strategy of using hundreds or thousands of small trades, some as short as a second, to make a high volume of tiny profits from short-term price action. 

It is however ideal for day-trading or swing-trading, which involves positions that could last for hours or days, and where the profitability of the trade does not rely upon split-second reaction times. 

Why automation is effective

Outsourcing much of the decision-making process to a machine helps to remove human trading psychology from the equation because it removes the human itself from the trading process. 

Such a system is likely to perform consistently over time and help the trader avoid a spiralling of performance when the pressure ramps up. 

As well as driving consistency, an automated process relieves a trader of some of the mental burden of making decisions. Where traders rely upon their trading as their main source of income, it can be stressful to witness a loss because the real-life consequences of a financial loss are close to the front of mind. 

After a sequence of losing trades, a trader who draws a strong connection between their own financial wellbeing and the profitability of their trades may begin to feel emotional and start doubting their trading ability.

By delegating responsibility for trade-spotting to an external system, helps a trader to disassociate their trading performance and their own individual competence. A trader who can point and blame a ‘system’ for failure, will experience weaker feelings of doubt, guilt and regret as they trade forex. 

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