Being a professional forex trader can add quite a bit of emotional content to your life. Fear, along with the other main trading emotions, greed and hope make the forex market move. Because of the inherent fear of losing money that affects everyone involved in the forex market, fear could be considered the market's number one emotion.
In general, the emotion of fear arises from a perceived threat and developed as a natural defense mechanism in most animals. The limbic brain, which makes up the most primitive and reptilian part of the brain, controls fear which originally took the form of the "fight or flight" self-preservation response characteristic in all higher animals.
A Forex Trader's Fear Responses
Several types of fear arise often in the course of trading whether consciously or unconsciously, these emotional responses include:
• The fear of failure
• The fear of missing out on potential profits
• The fear of losing everything or impending doom
The fear-based emotional responses cited above find their expression daily in the markets and often contribute to trading losses unless appropriately managed.
Nevertheless, fear can be extremely useful in the event of calling the market wrong, as W.D. Gann, a well known trader from the last century noted "Fear will often save you if you act quickly when you see that you are wrong."
Many professional traders will admit to allowing the gut feeling of fear to give them an indication as to the right time to get out of a trade. This applies to situations where the trader is either taking a profit or cutting losses short. Another Gann quote on fear sums it up nicely: "The fear of the market is the beginning of wisdom."
How Fear Manifests in Forex Trading
Having a great trading system and all of the technical and analytical tools for success in trading will not suffice to be successful; a trader has to have the right mindset. This can only be accomplished by learning to control emotional responses when trading and in all trading situations.
Most people have no way to know how they will react and what emotions they will manifest until well after they have begun to trade and have no idea how much their emotional response will impact their profitability.
Another emotional response which can adversely affect a forex trader involves fear impeding the trader from taking action. This can be especially damaging if the trader has a losing position and finds themselves paralyzed while the market continues moving against them.
This type of response may also impede a trader from taking advantage of a trading opportunity going against their own trading plan and allowing fear to prevail over their own instructions.
Another instance of fear which arises during forex trading tends to happen after the trader has made a losing trade. Because of a lack of confidence caused by the previous losing trade, the forex trader might be too afraid to jump back in regardless of an opportunity to make back the money lost on the losing trade.
Dealing With Fear When Trading Forex
Basically, when dealing with fear, keep in mind that fear relates almost exclusively to future events. This could take the form of prolonging an unacceptable situation or of making a present situation worse.
A good way to deal constructively with fear is using fear to replace hope which can be extremely detrimental to a trader. For example, instead of thinking, "I hope the market will come back," you can replace that thought with the much more helpful, "I'm afraid I'll lose more money." This thought replacement technique also aptly illustrates the dilemma that a forex trader faces when they have made a losing trade.
Basically, if you can be disciplined and able to trade with a sound trading and money management system, fear and other emotions can easily be controlled. As long as you "plan your trade and trade your plan," fear can usually be kept at a minimum in your forex trading.