The success of a forex trader does not depend solely on strategy and analysis. How a trader thinks and reacts to market movements and outcomes also matters.
Trading psychology refers to the mindset and behaviour of a trader.
After all, the forex market is not for the faint-hearted. To become a successful forex trader, you need to get the right mindset and know how to control your feelings.
As a beginner-forex trader, mastering the art of detaching your emotions from trading may be challenging. However, with time and consistency, you can master the art.
What is trading psychology?
Trading psychology is all about the emotions and behaviour of traders when trading. It encompasses the ability to think quickly with a good sense of judgment and discipline. It also involves knowing how to control fear, greed, and anxiety that may influence a trader to make a wrong decision.
Many traders lose out because they lack the discipline to follow the trading strategy. Traders who can not contain their emotions will not be able to handle market volatility. They will overreact when the market is moving against them and overtrade in a winning market. Some would not even follow their intuition; they will follow the crowd to make popular trading moves which may eventually lead to massive failure.
What are the basics of forex trading psychology?
Understanding and overcoming fear
As a successful trader, fear is the first emotion you need to learn to control. It's not that you wouldn't feel it. You should have a plan on how you will react to such emotion. Fear of losing money may make you close your position prematurely or keep trading after consistent loss with the hope of making a profit at some point.
Fearful traders are quick to react to negative economic news or market movement. They rush to close their trade and retrieve their capital without carefully analysing the situation.
One way to overcome fear is to plan ahead of an adverse event. Imagine the worst-case scenario and determine how you would react if it eventually occurred. Like that, any event will not meet you off guard or trigger fear that may ruin your profitability.
Understanding and avoiding FOMO
FOMO means fear of missing out. It is herd behaviour that influences a trader to do what others are doing. This may mean entering a trade without proper analysis or closing a position earlier without justification other than others are doing it.
FOMO is often triggered in a volatile market. Traders guilty of FOMO can jump right in and risk a lot of capital because they believe other traders are making handsome profits and do not want to miss out on it. Traders who trade on FOMO can suffer massive losses and emotional stress due to a lack of careful judgment.
Once you understand FOMO, you should take steps to avoid it as soon as the feeling arises. Before you follow a trend or act on a rumour, dissect and evaluate it. Only ride on when you are convinced by all technical and fundamental indicators that it will be a profitable trade. If at all you still want to trade the popular market movement, trade with small capital you can afford to lose without having sleepless nights.
Curbing greed
Greed is another arch enemy of forex traders. Greed is the emotion that lures you to overuse leverage so that you can make an excess return. The same greed will also hold you back from making a profit at a reasonable point.
"Maybe I can profit more if I leave my position open for more days."
When you hold on to a position for too long, hoping for more upward price movement, you may sink to a monumental loss when the trend reverses.
Greed is a notorious emotion that may be hard to overcome because it is fueled by the need to perform better. However, you can get over it. Proper planning and mechanisms like taking profit orders can curb the appetite to make more money. You can also be prudent by setting a reasonable leverage threshold and abide by it whenever you want to open a position.
Risk management implementation
When you have all the necessary risk management, your mind will be at peace and clear to trade. Techniques such as stop loss order, setting a threshold of when your position should be closed automatically after losing a certain amount, will curb the urge to continue trading in a losing market due to fear of not making any profit. Taking a profit order that closes the position when you've made a preset profit level will also help you curb greedy tendencies.
Consistent trading strategy
If you choose one or two trading strategies that suit your personality and stick to them, you will know when to open and close a trade without undue influence. Learn about the pros and cons of different trading strategies and make your choice. Such strategies include:
- Range trading
- Position trading
- Swing trading
- Position trading
- Carry trade
- Price action trading
- Forex scalping
- Day trading
You can automate your strategies by using trading platforms like MetaTrader that can execute a trade on your behalf. Your strategy can also be manual such that you will have to sit before the screen, monitor trading signals by yourself, and execute a trade at your appropriate moment.
Automation works well because it eliminates emotion effectively, while manual methods can still allow sentiment to creep in.
Research and broaden your trading knowledge
Facts and precise figures can help you eliminate trading emotions. Seek adequate knowledge about how the market works. Stay on top of important news and events that can move the market and learn how to react to them.
Dedicate time to technical analysis by monitoring price movements through charts. Sound research will give you facts you can confidently rely on instead of emotions.
Having a positive trading mindset
Aside from trying to curb all negative emotions, it would help if you also strived to maintain a positive mindset when trading. Enter the market with an open and transparent mind. While you hope you win, know you can also fail. Don't be in denial when you fail.
Accept that the forex market is dynamic; sometimes you win, and sometimes you lose. You should also trust the process. You can't become an expert in a day; do your assignments and be consistent until you master the art.
Final words
Trading psychology has both its negative and positive sides. The forex market is very dynamic and competitive. To be successful in such a market environment, you need to know how to manage negative emotions and step into a positive mindset when trading.
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