Proportional Relationship Between Risk Management and Psychology

by FX EA Review
Proportional Relationship Between Risk Management and Psychology

Trading emotions such as greed, FOMO, and euphoria cause extreme harm to the performance of traders. Institutions rank psychology as a significant component of success for an investor in the financial markets. There are tons of books on this specific subject that deal in teaching traders the right mindset. They provide various tips, including avoiding any trades during fatigue, taking a walk when you feel angry, etc. 

Professionals constantly debate risk management as one of the vital components of having a proper mindset. Exposing the right amount of capital will not burden your thoughts as you are not afraid to lose it. Even though there is a ton of insight, some traders are still left with the stigmas and lasting effects of bad trading. They fear pressing the buy or sell buttons. To help with the cause, automated software comes into the front. These robots carry out all the trades on behalf of the trader, manage risk, and provide accurate signals with high probability.

Overview of robots and psychology

A trading robot is a computerized program that trades on auto without you having to press a single button. It is utterly devoid of any feelings or emotions that humans are subject to while trading. They never get tired and can work 24/7. Every single trade is presented solely based on the coded algorithm. 

Detrimental trading emotions that robots can remove

Let us discuss a few feelings that expert advisors can draw out of the equation. 

Greed

The most notorious killer of trading careers. Many traders ignore the fact that making money is a slow process, and while the markets can reward substantially, it will take time before you finally get some results. Holding the trades and expecting to get huge money while the price action has already exhausted leads to stop losses. Opening many trades without proper setup in a bid to earn more money is destructive. 

While robots may use excessive trades, they do not do so under the influence of making more bucks. Their sole intention is to follow what they are built for. Expert advisors who act as indicators will only provide setups when they are validated.

FOMO

You won’t be missing out on anything when there is a fixed system commanding order. A robot doesn’t fear that it is leaving money on the table. FOMO is prevalent only amongst traders who have a flawed game plan.

Euphoria

Getting hyped up when you see a few big gains pile up is common for traders. It leads to overtrading and demanding more from a position. The human brain releases all sorts of rush hormones, including adrenaline, cortisol while a market participant is on the screen. Having automated trading software in the equation will kick out all of these chemicals. 

Lethargy

A trader can never perform at their best when they are on the charts 24/7. The prolonged screen on time will definitely tire them out where they will show underperformance. Using a machine, on the other hand, is beneficial as it does not have any lethargy.

Using proper risk management with bots

Any trading system at your disposal that works without proper risk management is bound to fail at a point. It is possible to get some early wins. Select only those EAs that have a stop loss system to avoid losses. The market currently holds many automated trading software that uses the grid, martingale, and arbitrage strategies, exposing your accounts to significant drawdowns. Take a peek at the performance analytics of any robot before buying it out.

Risk management also includes the fact that your robot should not use more than a specified percentage of your total equity. Investors consider investing no more than 1-5% on any given trade. Modify your bot to do precisely the same. 

Does set and forget about work with EAs?

Using a forex VPS and a broker that supports complex algorithms, you can undoubtedly set and forget. Place your EAs on the charts and check them out once in a while to see if they are working correctly or withdrawing funds. Traders who use robots that utilize the grid and martingale strategy cash out their funds frequently as there is a change for a significant drawdown. 

Additional points you should know while trading with bots

Let us shed some light on a few critical notes that trade must not overlook with using EAs.

  • Tons of bots offer a high return on investment. Never believe them, as there is no way to get a good ROI without significant drawdowns.
  • Do not expect a bot to work entirely the way you like. It is, after all, a coded algorithm and will only perform tasks that it is encoded for. With new market conditions each hour, the robot will have varying performance.
  • Do not get depressed when a robot that worked well over the past fails to perform in the future. 
  • Having verified results of EAs on Myfxbook or MQL5 is the only way to ensure that the system is working. Never believe Telegram or social media posts.
  • To keep your risk, psychology, and money on the safe end, verify the robots’ developers. The team must be highly qualified and should be able to answer all your questions with ease.
  • If you know to code, then tweak your EA now and then to satisfy your constraints.

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