One aspect of Forex trading which is often overlooked is psychology. The truth is, your state of mind has a major impact on your level of success. If you haven’t given your psychology much focus, read on. This article looks at mastering Forex trading psychology in extensive detail.
Psychology is simply your state of mind. As with any other skill, competence is irrelevant if your state of mind isn’t right. This is particularly true for Forex traders. Trading in a live environment can cause significant mental stress – so you need to be sure you have the ability to deal with it.
For me, keeping psychology in check is critical. Those that don’t do this run the risk of making mistakes, which damages their profitability in the process. A classic example of this in Forex is “chasing a trade”. This is where a trader abandons their principles of risk management in an attempt to quickly recover losses. This move is often a result of traders being unable to move on from a loss.
Having worked with numerous traders over the years, I’ve come to realise that trading psychology is really driven by two things. The first is thirst for constant profitability. The second is a fear of failure. Most traders experience these feelings.
For me, these feelings are at the root of some common scenarios traders face throughout their career. In the rest of this article, I look at these scenarios in detail and explain how to react to them
A good percentage of traders want to trade Forex in attempt to get rich quickly. This is the wrong mindset and will lead to losses.
The truth is, to get rich quickly in Forex, you have to trade large volumes (often with leverage). Remember, leverage is essentially capital that a broker lends to a trader to allow them to make bigger trades. It can significantly amplify a trader’s profitability. But this principle also applies to losses. In the wrong hands, leverage can lead to all account capital being lost.
It’s a dangerous game, especially for inexperienced traders. In fact, I’d say this type of trading is closer to gambling than professional trading.
If your motivation to trade Forex is to get rich quickly, it’s time to alter your psychology.
Firstly, you need to accept that Forex is no different than other profession or skill. Becoming competent requires dedication over a sustained period of time. All successful traders that I know spent years mastering the basics of Forex trading. Secondly, you need to accept that your expectations are unrealistic. Wealth from Forex trading is acquired over time. The best traders tend to be conservative in nature – that’s to say they don’t take unnecessary risks. Instead, they focus on making small but consistent profits.
Indecisiveness can limit a trader’s success. This issue is rarely discussed in trading psychology – but it’s an important one.
If you’re an indecisive trader, there are easy steps you can take to change your behavior. Firstly, it’s important to recognize that being indecisive isn’t necessarily a bad thing. In fact, I indecisive traders who are often the most thoughtful. However, this can become a problem if your indecisiveness leads to inaction.
To become more decisive in your trading approach, I suggest writing your intentions down in a trading plan. This should document your chosen trading methodology (which should be fundamental analysis) – and your risk management strategy. When it comes to opening a trade, write down the reasons behind your position, along with stop loss and take profit levels. If you can’t do this, it suggests you’re lacking confidence in your analytical ability.
I’ve already touched upon this topic. But this is something many traders do when their psychology isn’t right. Traders who do this struggle to accept that placing losing trades comes with the territory.
My advice is simple: when you experience a losing trade, let it go and move on.
You might experience feelings of frustration when you do this. Yet over time you’ll get better at accepting your losses and focusing your energy on the next trade,
When a trade moves against you, resulting in a big loss, it can be tough to take. I’ve been here a few times over the years. In these scenarios, some traders question whether Forex is actually worth the time and effort.
Big losses usually occur when a trader is feeling over-confident. This over-confidence can lead to corner-cutting when placing a trade. This might be something as simple as not setting a stop loss level. You can keep over-confidence in check by strictly following your risk management strategy. This should prevent big losses from occurring.
If you have recently experienced a big loss, your confidence is likely to be low. But you can build from this experience. Take your loss as an important lesson in risk management. Also, put rules in place that will prevent this kind of loss from happening again.
The body and mind are interconnected. It’s why those who exercise regularly often enjoy better mental health.
Unfortunately, Forex trading can easily become an unhealthy profession. It’s not uncommon for traders to be constantly switched on and monitoring their open positions. The evolution of mobile trading, in particular, has made it much more difficult for traders to disconnect from their trading.
Trust me, if you want to be successful in Forex, you need to strike a healthy work/life balance. This means you need to spend adequate time away from your devices. Here’s a routine I suggest you try and follow: