This might be why forex trading psychology – the observation and management of emotions and states of mind – is such an important aspect of trading success. Understanding and controlling the impact of irrational emotions such as panic, greed, impatience, etc, on the trading process is vital.
Greed can make you overtrade or take on too much risk, while fear can prevent you from being in a position to seize an opportunity. Overconfidence can make you take on too much risk, so it can always be worth having a plan ready when you trade the markets.
Greed
Greed: just another natural feeling. If its tides pull you into poorly considered trades – such as a reluctance to book profits or taking on too much risk – then you need to be realistic about your expectations, and remember that greed can creep in to your thought processes (and, therefore, your decisions regarding what trades to take). FX traders would do well to be self-aware of ‘greedy’ episodes and to change things for themselves, through use of a trading journal to capture every time they find they have been greedy; or to seek the advice of trading psychologists or psychotherapists, to restore balance to their way of trading.
Knowing about how our emotions influence forex trading crucially matters. Game plans and trading strategies are meaningless without self-awareness of emotional triggers. Instead of relying on emotions and impulsive decisions, traders can stick to their pre-determined game plans which would ultimately help them make better trading decisions. Common examples of emotional stimuli include fear, hopelessness, impatience and greed, all of which may unconsciously influence trading decisions of a trader; left unmonitored, these feelings can easily sway the trader into making impulsive decisions, potentially leading to major financial losses.
Fear
Emotions are inherent in the way traders make their decisions, including fear-driven bad decisions that lead to loss instead of profit. This is the same with any form of addictive behaviour – if poker were easy, it wouldn’t be so immensely popular. Trading is also a skill that requires self-discipline and consistency, and a certain amount of support from other like-minded traders seeking discipline and consistency. It takes a strong internal compass to bypass the psychological obstacles to profitable trading and achieve success.
Forex Traders risk losing profits because they neglect to focus on this vital aspect – their psychology. Lasting prosperity and success within Forex trading demands that the trader approach volatile market movements with a positive and assertive mind-set. This is because a key factor in succeeding in Forex trading is knowing which emotions – whether it is fear of loss, greed, impatience – impact trading you and learning how to make sure you avoid these impediments in your performance and progress. A successful trader will know how to control their emotions and mind-set so as to maximise their trading potential and ultimately, their trading success.
Overconfidence
Confident traders believe they can withstand risk and make the right decisions in a split-second – even when they are wrong. Hasty, emotion-ridden trades that switch direction can lead to unwanted losses when fireworks are fired into the crowd. By all means, have confidence. But be extra cautious when your trade turns against you.
While overconfidence can produce pushovers, people make more errors when they feel pushover-ish. By keeping good trading journals and talking through strategies in online or in-person groups, traders’ overconfidence can be reined in – and this will serve to mitigate the risk of overtrading.
Developing the right psychological mindset is arguably as or even more important to investing success as developing technical market expertise and remaining focused on what’s changing in the new world of what is coming next. Finding community of traders willing to share experiences and openly discuss personal pitfalls along the way is essential. At Smart Prop Trader we offer those cutting-edge, connected, risk-managed forex trading platforms that will help traders overcome the classical psychological hurdles to consistent, profitable trading.
Anchoring
Depending on our mental anchoring, we might react strongly to any deviation from that worth, such as feeling down when an asset’s worth drops below the price we paid for it, or worse, the price at which we sold it. Being mentally anchored to prices we’ve seen in the past, about items we might buy now, can set us up to make poor judgment calls and poor decisions – the reason why precedent and expectation are worth taking a good hard look at periodically.
The only way to control the emotions when trading forex is to devise and stick to a trading plan. A trading plan must encompass all the nuances of the market and your impulses. You will need to define the conditions that would trigger you to enter a trade and also exit from a trade. You will need to define the risk limits and define your position sizing. You will need to read about forex trading regularly and subscribe to a premium service. Many brokers offer numerous webinars and let you post on their online forums, which will allow you to keep yourself abreast with the news as and when they emerge.
These tips are not a comprehensive guide to the pseudo-science of Forex trading psychology, but they can help traders become more disciplined with the execution of their decisions, and avoid some of the common mistakes associated with the trading process. If heeded, they might even make them more profitable and successful Forex traders.
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