Psychology is a hot-button issue in Forex. Psychological aspects do influence traders’ performance. Emotions often affect our ability to look at the market clearly and to think in a cold-headed fashion. Sometimes even high-profile, very experienced and skillful traders fail to control their emotions while trading. No one is perfect. And we must say that markets, these wicked capricious beasts, tend to punish those who slack off, or those who overrate their abilities. So, traders must be able to control their emotions in order not be punished afterward.
What are the dangerous emotions?
Anxiety, fear, and panic
Anxiety is one of the worst enemies of traders. It tends to convince them that they will fail to earn money regardless of the power of their trading strategy. So, instead of making big profits and earning lots of money, they don’t initiate any risky trades, or exit positions earlier than it’s needed being unable to wait for the realization of their initial targets. It is the most common mistake of novice traders.
Moreover, people are not indifferent to their hard-earned money. They don’t like to sit and watch how their trades are acting against them. They will probably do something to stop the bleeding. And if they don’t know how to act in this stressful situation they start panicking and undertaking hit or miss actions that usually lead to financial losses. Periods of market volatility are the most common catalysts of such irrational actions. Increased price fluctuations result in the loss of confidence in our trading choices, we start questioning our trading strategies and try to change something at the peak moments.
Keep calm. Panic will only distract you. Remember about your goals. Use Stop Loss and Take Profit orders. Once you put the protective orders in place stick to them.
Forex traders are money-oriented people. They have a drive for making money and attach a really great importance to their financial success. Moderate amounts of such an approach are quite necessary. But if these healthy stimuli/drives turn into unhealthy ones, they may cause financial losses. You should learn to control your appetite for profits. Otherwise, you risk to drain your pockets.
For this not to happen, you should apply a disciplined approach to your trading activities that could minimize the role of emotions in our trading decisions.
Sometimes traders fall into euphoria. They experience an intense feeling of excitement and exaltation after a string of profits. They aspire to receive more in the future and see a truckload of trading opportunities. In simple terms, they get assured that they managed to find a flawless win-win approach to Forex trading. But in a longer term, they get disappointed because after the sunshine the rain begins. The trader comes gradually to believing that no market analysis is flawless; that next trade is not always profitable. The period of euphoria ends, and trader becomes more cautious in his/her future undertakings.
Don’t get carried away. Know when to stop during your winning streak.
Getting in the right mindset to trade successfully
The rule number one is to adhere to your initial trading plan and properly execute the basic money management rules. Follow a defined methodology. Rely on logic and not on impulse, as during an impulse trade you’ll likely forget about the proper risk management. You must feel that you are making the right play and not worry about the eventual outcome.
Don’t bury yourself in regret if the price continues to rise after you closed your bullish position. The market isn’t going anywhere and there will be lots of other opportunities to make money.
Some authors speak about the “zone” – a combination of positive mindset, focused attention, and adherence to trading discipline that allows the best traders to keep on producing outstanding results day after day, year after year.
Dealing with losses
Get used to the idea that losses will happen. There is no trader in the world who could manage to have profit on every trade.
Understand that you cannot turn the time back and execute your trade once again. It’s like being on a diet and eating chocolate cake. Once you ate the whole sweet thing, all you can do is to go back to the gym and start doing exercises to work it off. The same is with trading. Once you lost money, analyze why it happened, make conclusions and use the knowledge and experience you gained to improve your trading system. Don’t think that you need to win back the money you lost. Accept the loss and move on. Your goal is not to compete with the market, but to make money on Forex.
Becoming psychologically strong
Accept the fact that good results in trading require hard work. If you don’t delude yourself that you will get immense profits in no time, you will protect yourself from unjustified disappointment and will be able to focus on your goal. Remember that Thomas Edison performed 2,999 experiments before he invented the electric light bulb.
Alleviate your stress. Take breaks from trading and occupy your mind with something else. Lead a healthy life with sports or at least walks and good food. Spend time with your family and friends. All of this will help you to relax and have more strength for trading.
Find some fellow traders to discuss your fears and problems. Speaking out will help get rid of stress.
Constantly increase your knowledge about trading and Forex market. Take courses, read books and articles, learn from professionals. The more you know about trading, the more psychologically sound you will feel.
The winning formula from Linda Raschke
The famous trading coach Linda Raschke in her book “Professional trading techniques” invented a special formula for trading successfully.
So, for earning more in Forex:
- Passion – you need to have a driving force that motivates you to succeed.
- Belief – you must believe that you can achieve your goal.
- Game plan – you should have a strategy or business plan to attack your goal. Lack of organization and preparation is the main reason of failed trades.
- Integrity – you should develop your personal value system.
- Commitment – you should remember that commitment opens an unlimited source of energy reserve inside us. It provides us with strength to keep moving forwards each day, even if there is no visible progress.
Other articles in this section
- Chart patterns
- Uncovering Gann indicators
- How to create your own trading strategy?
- Candlestick patterns
- Trend trading
- Carry trade
- Swing trading
- Position trading
- Day trading
- Trading styles and strategies
- Fibonacci tools
- Identifying market’s reversal
- Japanese Candlesticks
- Market conditions: trends and ranges