Emotions and Forex

I would like to tell you about some of my experiences and views regarding the emotions that affect us when we trade and that we should learn to control. As in any business where money can be earned or lost, emotions have a strong impact on our mind, while in making decisions one should be cold and rational. After a long experience in trading currencies, it still happens to me, too often, to make a wrong move because of psychological pressure. Here is my experience with a position that shows how emotions can affect our decisions.

At the end of March of this year (2019) I went with my wife for a long 3-week vacation in an Asian country: a 2-week tour, and at the end a real week's holiday on a remote island in the Indian Ocean. I would be delighted to say that the vacation was paid with the money I earned on Forex, but this would not be the true: only part of the expenses was covered by this source of income. When I go on vacation I try to leave everything behind, that is, work, my hobbies, including the Internet. For me, vacation is a change of pace and habits. Here I must point out that I don't have a smartphone (never even had a simple mobile phone) and I'm not one of those who spend half a day on Instagram and Facebook (I don't even have the related accounts). During the journey I am taken by what surrounds me, by nature, by people, by their behaviors and habits, and of course by local foods and drinks.

When we arrived on the island, to rest after an intense journey, the rhythm became slow and relaxing. The morning coffee on the terrace of our jungle bungalow was my favorite part of the day. We continued with breakfast, went to the beach until lunch, and went back there even after lunch. In the late afternoon we had an aperitif, after which dinner followed and we went early to sleep. The book, a mystery story, I had chosen for this trip, followed me. The only place where Wi-Fi was present, was the reception area. After 2 days spent in absolute peace, I asked my wife the permission to use her smartphone: she was in a good mood too and gave me her favorite item. I opened my Forex account to see the situation. One of the positions closed with profit and I immediately wanted to reinvest the available capital.

I set order to sell the USDTRY pair (US dollar - Turkish lira) when it reaches the value of 5.650. It was April 5 (Friday) and the value was around 5.62, which meant that there was little left to activate my order. I was too impatient. The previous days the value was growing, and I was afraid it could come down before I took the opportunity. The following Monday, after the markets reopened, the dollar started to grow strongly, the position was opened, and after a few hours I already had a considerable loss. To better understand the story, I used the leverage for 10. Given the negative trend, I immediately raised the "stop loss" limit, to ensure the long-term hold of the position.

Meanwhile the journey had come to the end, but the dollar continued its rise; the direction opposite to the one I was hoping for. In mid-May the maximum price of 6.2445 was reached, almost 11% more than my opening. Multiplying this value with leverage 10 means that, at that moment, I was losing more than 100% of the invested amount. Fortunately, the "stop loss" was sufficiently high. The line of the graph had finally begun the descent and my breathing was less labored. So, we arrived on June 5th when the value touched the opening one, but after the dollar it rebounded and returned to growth.

It is important to underline that the position gave a small gain every day thanks to the positive overnight refund and that already at that moment I had gained quite a bit of interest. I could also allow myself to close the position with a limited loss, and to have an overall gain thanks to the positive refund. All these strong movements that are seen in the chart below are due to the fact that the Turkish president had fired the president of the central bank and put at his place a man of his confidence. The markets have reacted strongly, and this explains the couple's dance. I was afraid that something strong could happen again and that I could get out of the positive field.

Moving of currency pair USDTRY from February to July 2019

Finally, June 24th arrived, and I decided to close the position manually. The loss was 18.48%, but in 2 months and half there was a gain, thanks to the positive interest, of 45.08%. The final result was a 26.6% profit; I was very satisfied. It was the first time I could make a profit thanks to positive interest, despite the position was closed with a loss. As you can see from the graph above, which I intentionally truncated to 3 days after closing the position, the value remained higher than the one where I had closed. It seemed to me that I had found a good compromise in closing the position. Below is the same graph, but moved to the right, which shows the trend until today, when I write this article (end of August). We see that the dollar continued to weaken and that with a little patience (and courage) I could not only avoid closing at a loss, but to make a nice profit.

Moving of currency pair USDTRY from April to August 2019

Here you can observe two psychological moments with which I often meet:

1) The haste to open a position so as not to miss a good opportunity Suppose the price of a currency pair goes up and we want to sell it. It is ideal to sell when the chart reaches the top, a moment before or after it starts to go down. At some point my instinct tells me that the trend will change, and I sell directly, without making an order. The problem is that the top is not necessarily reached. The real problem is that the top may still be very far away and that in a few hours one can be found with a considerable loss. In my notebook I wrote the recommendation: always open by an order, at least 50 points more or less than the current value. The recommendation is good, but the problem is that I don't always respect it. I would conclude: it is better to lose a good opportunity than to open a position that could lead to a loss in the future.

2) Impatience to close a position for fear that the trend changes and goes into the area of loss. It happens frequently that a position is in the positive field, but the variation of price is strong, and one is afraid that it will return into the negative field. For this reason sometimes the position is closed with a minimum profit, after which it is discovered that, leaving it open longer, the gain would have been much higher. When this happens, I am sorry but at the end I console myself because I could, if things went differently, have a loss; in my concept of Forex this is to be avoided at all costs. It's all a matter of experience, patience, prudence and courage.