I have been a full-time trader for some eight years and one of the most important things I have learned so far is the tripod of successful trading.
It’s critically important to keep all three legs up when it come to Forex trading psychology:
… If one leg falls…
…everything will fall apart.
Forex trading psychology is the deciding factor in whether you will be a good, average or losing trader.
It’s an important discipline that needs to be studied and understood, by anyone aiming for long-term financial trading success.
Self-mastery and emotional control are key to achieving trading consistency
Fear, greed, hope and regret (aka The Four horsemen of trading) are powerful enemies to a rational decision-making process.
The Four Horsemen in Forex trading psychology
Wanting success is natural and necessary.
But if you let fear rule your decision-making process – you will not reach your full trading potential.
Fear will cause you to leave trades before they reach fruition and over the longer term, you will probably not survive as a Forex trader.
Calculated risk is a necessary part of Forex trading – just make sure you understand risk management before you trade.
A common scenario for beginner traders when winning is to become euphoric and eventually over-confident. Greed creeps in and the newbie enlarges positions to make more money. But what about the risk? A euphoric trader will generally neglect the larger risk and only see the larger profits. But enlarging the position is not the problem – enlarging it too much is. Euphoric or winning-streak traders, tend to enlarge their positions to sizes much larger than the profit they gained in their accounts. When it come to Forex trading psychology this is one of the worst possible emotional states.
And as soon as you forget about money management rules…
…account liquidation can be just a few bad trades away.
Hoping that every trade will result in profit is nonsense.
Hopeful traders will move their Stop Loss further away or delete them together because they think the market will turn around in their favor.
But hope works in synergy with greed.
When traders hope for an unrealistically large profit and move profit targets further out, the result is:
- very small profit; and
- huge loss.
Regret destroys your confidence and drowns your trading abilities.
The good news here is:
…there’s really no need to regret any trade.
Ask yourself if you are:
- willing to accept losses as part of trading
- willing to take sole responsibility for your account
- prepared to devote time, effort, and goodwill to learning to trade?
If you answered yes to the above questions, then congratulations – you are ready to take your first steps towards being a Forex trading psychology fit trader.
As part of learning Forex trading psychology, you might consider joining our seminar to learn more about proper Forex trading psychology and how to make correct trading decisions.
You need to think about emotions in terms of price action.
Boredom is a negative spiral resistance and contentment is positive spiral support.
Whenever you lose a trade, don’t let your emotions break the support.
Breaking support will lead you into a negative emotional spiral.
If you don’t react and stop falling, you will invariably become trapped in a spiral of doom.
But not all the emotions that affect trading are negative.
Starting to trade while being optimistic, can provide you with a balanced set of emotions.
After all, emotions are energy:
….so always try to be positive…
…just not euphoric.
Making a trade while being optimistic will:
- make you feel good when you make a profit; and
- keep you away from the spiral of doom when you lose.
The Market is Not Your Enemy
Once the Forex trading psychology aspects are recognized, you should be able to identify specific emotional states that can be beneficial or negative to your trading.
All of the pitfalls I have outlined above, highlight why trading processes and associated risk management techniques exist. They are born from mistakes.
They are meant to protect you from an unpredictable world and your emotional reactions in response to unexpected developments. Mastering your Forex trading psychology to be a profitable trader, can take time. And the amount of time will be different for each trader. So proper education is important.
Developing a proper trading mindset will happen:
…but only after working long and hard on yourself.
It may even happen without you knowing it.
And it usually happens when you least expect it.
The best way to find out what causes mistakes in your discipline is to keep a trading journal and investigate each of those lapses.
Learn to see your mistakes as opportunities to learn more about yourself and bear in mind that nobody is perfect – so don’t be too hard on yourself.
Cheers and safe trading