It is an interesting term that is associated with forex trading. When you trade under the influence of your emotions, it is termed as Emotional Trading. It is a common form of trading. Newbies often fail to control their emotions and get swayed away in the flow of their emotions. Both profit and loss can make them take emotional trading decisions. Obviously trading made in the extreme flow of emotions result in loss.
Let’s assume a situation, if a trader risks 2% of his capital amount on a trade and he wins. Such a win will enhance his confidence. If by chance he wins this trade too then the profit of this trade will make him overconfident. Now he will start to boast about his extra-ordinary trading skills. Next time he will risk 10% on a trade and if by some luck he continues to win then next time he is likely to take risk of 25% on a trade. He hopes to make a treasure in a single shot but such an emotional decision most likely break his backbone by making him lose his one quarter trading account in a single trade. It is mostly the case of newbies who lose their entire trading account in a few trading day and quit even before the end of the initial phase of trading.
Similarly in case of continuous loss in a few initial trades will make the newbie lose his confidence. He begins to doubt his skills and regret his decision of forex trading. He tries to distract himself in indulging in more trades. But now he has lost his concentration so he continues to loss. Now he has become desperate, he wants to get out of this situation therefore he risks his entire remaining trading account on the next trade. He hopes to earn a lot or lose everything. That appears to be the only solution for him. Thus eventually he loses all of his trading account as he is not in the right state of mind. Depression has made him to take a wrong turn which resulted in the collapse of his dreams of earning a huge profit.