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Forex Trader Psychology: Myth or Reality?


May 6, 2020
Forex Trader Psychology: Myth or Reality?

If money management is one of the most important factors to be a successful trader, Forex trading psychology ranks very, very close. Forex trading psychology is nothing new.

There’s quite a lot of research and literature on the matter, and the findings have always opened this discussion: Is Forex psychology a weapon, something you can learn from and use in your favour or is it merely an interesting case study?

The answer is simple. Forex psychology is a weapon if used right. Trading involves severe highs and acute lows, causing the trader’s psychology to go through a roller coaster ride.

To have any chance to stay afloat, a trader must be able to manage, control and command their feelings. Honing trading skills, techniques and knowledge are merely half of the battle as decision-making is usually governed and dictated by impulse, emotions and instincts.

Emotions and Their Impact On Trading

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Emotional Traps: Learn To Recognize And Avoid Them
Fear
Fear of losing is a pervasive state to find yourself in as a new trader. You approach every trade conservatively, not necessarily thinking about how to win but rather how not to lose. This type of approach gets also found in the world of sports, with teams entering games with a defensive strategy.

While there are no clear stats to show that such an approach is wrong altogether, there are real-life trading examples that showcase how the fear of losing can be the reason for losing. But let’s see an application of this theory.

The first scenario is one where the trader does not let the trade fulfil its full potential and exits prematurely. If the trade is trending in a negative direction, fear causes the trader to stop and exit the trade so that they don’t accumulate further losses.

The reality though, is that fluctuations are an integral part of every trade and reacting to every single movement of your chosen pair can end up being damaging.

The second scenario employs the same logic only this time the trader exits a winning trade instead of a losing one. When a new trader is in a winning position during a trade, fear prompts them to exit, so they don’t risk losing. Even though the trader will exit the trade with a profit, anxiety might just cause them a more significant winning percentage.

Greed
Simple one yet something that almost everyone falls victim too. Wanting more is an innate part of human psychology. Everyone has a different personality, yet we are all bound by the same human tendencies and not being easily satisfied is one of them.

Traders of all experience levels fall in the trap of diverging from their original strategy and pursuing higher profits. Whether it’s a seemingly “impromptu” trading opportunity or an unexpected development on a current trade, greed finds the way to slip through the cracks and make its suggestions on how to make more money.

Ego
A tricky one. Why? Because ego can often masquerade itself as strategy, causing traders to stick to their guns even though they should either exit or continue with a trade. The plan is put in place to keep your budget alive and discipline you, give you a direction, a pace and a rhythm.

What it’s not there for is to become an enforcer of your ego. Admitting you’re wrong and adjusting your approach is one of the most crucial characteristics and skills a trader can acquire along the way.

The majority of people don’t want to admit they’re wrong, and the feeling of being proven right is terrific. Still, trading is a highly volatile activity, and errors of judgement are virtually a guarantee. Once those hiccups show up, it’s imperative to reconsider your original plan and restructure it based on the new state of affairs.

Revenge
The market is not a person and “getting back at it” is not the way to go when you lose a trade. Each trade is entirely and utterly separate to the one you just lost, and the ability to forget quickly is essential when that happens.

Assume responsibility for the loss, investigate what went wrong, take notes that might prove helpful in the future and move on to the next trade bearing no feelings or connection to what just happened. If you want to get exact revenge on a losing trade, you should consider leaving it all behind and focus entirely on the next trade at hand.

Can’t A Demo Account Help Me Manage My Feelings?

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Sure, a demo account is a way to go when you’re starting, or even if you’re a more experienced trader, simply because there’s no real financial loss or damage to incur.

Logic dictates that a demo account creates the ideal playground to test your impulses, behaviour and feelings and see how good you are at taming them. That sounds good in principle, but the real-life application defers massively.

The human brain, unfortunately, recognizes that this is a demo account and there is no real prospect of making money and subsequently adjusts reactions to what’s happening.

The temptation to engage in riskier and potentially more bad trades is much more robust with a real account because the trader gets emotionally invested in the outcome.

A demo account is a must for so many different reasons. Still, it would be good to manage your expectations when it comes to the emotional part of trading as nothing can simulate real-life scenarios.

How To Stay Objective In A Subjective Industry

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If Forex trading had a synonym, it would probably be conjecture. Nothing is a certainty, and nothing is for sure in the world of trading. Situations change constantly, and the trading value of currencies is subject to so many altering variables that staying on top of it all is challenging to say the least.

Throw in the multitude of emotions we’ve already described in our previous section and what you have is a maze that’s impossible to navigate without going around in circles.

The following list of tips will help you clear your head, manage those emotions, be objective and turn Forex psychology into a weapon that acts in your favour. Here you have it:

  • Write down what your original expectations are
  • Create three columns on a piece of paper to categorize your thoughts on potential moves: For, Against and Undecided.
  • Ask yourself this question:” Based on my notes in each column, what would I do if I didn’t have an open position?”

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

Categories: News , Trading

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