Trading psychology is a critically important topic for traders to learn about early in their trading journey because if you don’t understand the role that your mind plays in trading, you will be stuck in a cycle of never-ending trading mistakes and account blow-outs.
Trading, perhaps more than any other profession in the world, is an extremely cerebral endeavour. Meaning, most of what you ‘do’ while you are trading, takes place within your own mind. If you do not properly control your mind, you stand absolutely no chance at making consistent money in the market, in fact, you will almost certainly lose money if you don’t understand and control your mind.
From my experience, it has become obvious to me that whilst most traders are aware that psychology is an important factor in trading, very few of them focus on it enough. Trading psychology falls into the same boat as money management for many traders, that boat is the “I’ll do it later after I start making some money in the market” boat. Unfortunately, this boat never comes for these traders, because it’s impossible to make money in the market if you don’t make a proper and conscious effort to master your trading mindset.
You have probably heard that a lot of people who attempted Forex trading end up losing money.
There’s a good logic for this, and the reason is primarily that many people think about trading in the altered light.
Most people come into the forex market with unrealistic anticipations, such as thinking they are going to leave their jobs after a month of trading or thinking they are going to convert $1000 into $1,000,000 in just a few months.
These unrealistic anticipations work to promote an account-destroying trading mindset in most forex traders because they feel too much tension or “need” to make money in the markets.
When you begin trading with such “need” or pressure to earn money, you enviably end up trading forex emotionally, which is the fastest way to lose your fund.
The emotions of trading
To understand and then eventually conquer your trading psychology, you need to have a thorough understanding of the major emotions that you’ll undoubtedly experience as you trade the market.
Note: these emotions mainly apply to trading a live account, demo trading does not bring out the same emotional and psychological reactions in people because there’s no real money involved.
Greed – There is an old saying that you may have heard concerning trading the market, it goes something like: “Bulls make money, bears make money, and pigs get murdered”. It means that if you are a greedy “pig” in the market, you are almost inevitably going to lose your money.
Traders are selfish when they don’t take profits because they think a trade is going to go endlessly in their favour.
Another thing that greedy traders do is combining to a position just because the market has moved in their support, you can add to your trades if you do so for reasonable price action-based purposes, but doing so only because the market has moved in your support a little bit, is usually an action displayed out of eagerness.
Apparently, risking too much on a trade from the very beginning is a greedy thing to do too. The point is you need to be careful of greed because it can sneak up on you and destroy your trading account quickly.
Fear- Traders become fearful of penetrating the market usually when they are fresh to trading and have not yet mastered an efficient trading approach like price action trading (in which they should not be trading real money yet).
Fear can also result in a trader after they knocked a series of losing trades or after experiencing a loss larger than what they are emotionally able of absorbing.
To conquer the fear of the market, you have to make sure you are never risking more money than you can afford to lose on a trade. If you are totally OK with losing the sum of money you have at peril, there is nothing to fear. The fear can be a very limiting emotion to a forex trader because it can make them miss out on good trading chances.
Revenge-Traders experience a feeling of “revenge” on the market when they experience a losing trade that they were “certain” would work out.
The important thing here is that there is nothing “sure” in trading…never.
Also, if you have risked so much money on a trade (beginning to see a theme here?), and you end up losing such money, there’s a good possibility you are going to want to try and rush back in the market to make the money back….which usually going to leads to another loss (and sometimes an even bigger one) since you are just trading emotionally once more.
Euphoria-While feeling euphoric is a good thing, it can do a lot of harm to the account of a trader after he or she hits a big victory or a large string of winners.
Traders can become overly confident after winning a few trades in the market, for this purpose, most traders experience their greatest losing period’s right after they hit a bunch of money in the market.
It is remarkably tempting to jump right back in the forex market after a “perfect” trade setup or after you make 5 winning trades in a row…there’s a fine line between holding your feet in reality and thinking that everything you do in the market will turn to gold.
Numerous traders enter into a tailspin of the emotional trading and losing money after they make a string of profit. The reason this occurs is because they feel very confident and euphoric and then forget about the real risk of the market and that ANY TRADE CAN LOSE.
The main thing to remember is that trading is a long-term game of probabilities, if you possess a high-probability trading edge, you will eventually make a profit over the long-term if you follow your trading edge with utmost discipline.
But, even if your edge is 70% effective over time, you could still hit 30 losing trades concurrently out of 100….so keep this fact in mind and forever remember you never understand WHICH trade will be a loser and WHICH will make you a profit.
The 5 Common Forex Trading Mistakes
There are usual errors that give nearly all traders trouble at some point in their trading professions. So, let’s cover the most common blunders that traders make which keep them from making money in the forex markets:
#1: An Analysis-paralysis
There is the virtually unlimited amount of Forex news fickle that can occupy a trader, as well as tons and tons of trading strategies and trading software.
You’ll need to screen through all of these variables and forge a trading strategy that is a simple yet effective warning; this can be a very a difficult task for beginner traders.
The reason is that most traders seem to think that ‘more is better,’ when in reality ‘more’ is worse, as it relates to Forex trading. There is no need to sit in front of the computer for hours on end analyzing Forex news reports or various indicators.
My trading theory is that all variables that influence a market’s price movement are shown via the price action on a price chart.
So, wasting your time and money on trading systems, software, or analyzing news variables is simply a waste of time. Furthermore, many traders get analysis-paralysis, this happens when a trader attempts to analyze so many market variables that they weaken themselves to the point of committing silly emotional trading errors.
Many traders do not make money in the market on the long-run for one simple reason: they trade far too much. One interesting fact of trading is that most traders perform excellently on demo accounts, but then when they begin trading real money they do horribly.
The reason for this is that in demo trading there is practically no emotion involved since your money is not on the line. Therefore, it goes to show that emotion is the #1 killer of trading success. Traders who over-trade are operating solely on emotion.
Trading when a pre-defined trading edge is absent is over-trading.
Trading without a trading plan or have not mastered a trading edge yet is over-trading.
Primarily, you need to know precisely what you’re looking for in the forex market and then ONLY trade when your edge is available. Trading too much causes you to rake up transaction costs (spreads or commissions), and it also makes you lose money a lot faster since you are totally gambling on the market.
You need to take a calm and calculated approached to the forex market, not a drunken-gamblers approach…which appears to be the favoured approach of a lot of traders.
#3: Not applying risk reward and money management accurately
Risk management is crucial to achieving success in the forex market. Risk management involves managing your risk per trade to a level that is sustainable for you.
Most traders ignore the truth that they COULD lose on ANY TRADE taken. If you know and admit that you could lose on any trade…why would you EVER risk more than you were ready to lose?
Traders make this mistake time and time again…the error of risking too much money on a trade.
It only needs one over-leveraged trade that goes against you to fix off a chain of emotional trading mistakes that cleans out your trading account a lot quicker than you think.
#4: No trading plan and no discipline
Not having a Forex trading plan is probably the most prevalent trading mistake a Forex trader make. Many traders appear to think that they will build a trading plan “later on” or after they start making a profit or that they simply don’t need any or can just keep it “in their heads.”
All of these rationalizations are merely keeping traders from achieving the success they desire so badly.
If you don’t have a Forex trading method that details all your actions in the market as well as your overall forex trading approach and tactics, you will be far more likely to trade emotionally and from a gambling mindset.
Beginner need a Forex trading plan to thicken their trading strategy and to create a pattern that they use to trade the market from, and you can’t keep it in your head…you need to write physically out your trading plan and read it daily before you start trading.
•#5: Trading real money too soon or gambling with it
The urge to dive into the market and start trading real money is oftentimes too much for most traders to resist.
However, the fact is that until you have learned an effective Forex trading strategy like price action trading, you actually should not be trading real money.
By “mastering” the strategy, I imply you should be consistently successful with it on a demo account for at least a period of 3 to 6 months, prior to going live.
However, you don’t fancy using demo account trading as a crutch…trading a real account is different owing to the real emotions involved, so just be certain you switch to real money trading after you have attained success on demo…dodon’t be scared of trading real money, because you will eventually need to make the switch to real money trading one day.
Also, make sure you are not just gambling your money away. These things we discussed above; i.e. over-trading, over-leveraging, not having a trading plan, etc. are all things that gambling traders do.
Traders who don’t gamble their money in the markets are calm and calculating…they have a trading strategy, a trading journal, and they know precisely what their trading edge is and when to trade such.
The psychology of a successful trader
Psychologists have made profiles of many professional groups such as the police, pilots and firemen. It is becoming more and more frequent that businesses of all sorts are beginning to request job applicants to undergo psychometric tests to see if they are suitable for the job. In these tests, certain personality qualities are seen as more desirable than others for particular lines of work.
Even more recently, psychologists, often traders themselves, have turned to look at what attributes make the successful trader. The University of Minnesota has carried out one such study. They found:
1. Open-mindedness – Successful traders are open to new ideas. They do not close their minds off to other possibilities if these can be shown to be beneficial. They will have a successful system of their own which works for them but they are quite willing to try out other ideas that seem promising.
2 Conscientiousness – Trading requires a lot of hard work and successful traders take their job very seriously and are prepared to go that extra mile. They will not trade unless well-prepared. They also follow their trading rules without fail, not taking a trade unless all criteria are met.
Conscientious traders keep to a regular schedule and rarely diverge in trading or life. They are also meticulous in their adherence to their trading journal.
3. Personality types can be separated into introverts and extroverts – Trading is a solitary activity. One would, therefore, expect that introverts would do best. However, many traders like to link up with other traders within forums or otherwise and form networks for the exchange of ideas and information. This would classify them as extroverts, as they usually are in the normal daily lives. But even introverts these days are employing coaches and mentors as they realize that isolation leads to a narrow perspective and tunnel vision.
4. Helpfulness – Successful traders are willing to share their knowledge and skills with others to help them improve. They seem to sense that the odds are against them and that survivors should support one another. Many successful traders become forex trading coaches to not only benefit themselves in their learning curve but to help others attain success. They realise that not everyone can become a successful trader but they know that for some they can make a real difference.
5. Neurotics – May succeed in other professions but are not likely to succeed at trading.
A positive and win-oriented outlook is a key quality in any field and particularly in trading. This does not, however, mean that people who do not possess the attributes listed cannot become successful forex traders. Motivation and passion will help develop techniques to overcome any not so ideal qualities. And personality characteristics are not set in stone. In addition, overcoming such obstacles shows determination and that is a quality that makes a winner.
Analysis of oneself and identifying strong and weak points will bring fruition. Personality is important and plays a major role, for instance, how self-disciplined and in control of your emotions, you are. If these are lacking, then they have to be developed to become successful.
I have provided you with some solid information and insight into the world of trading psychology. It’s critically important that you do not underestimate the important role that your mindset plays in your overall trading performance. You NEED to make a conscious and concerted effort to control your behaviour in the market because if you don’t, you will almost certainly be controlled by your emotions and you’ll be at their mercy.