Establishing the proper trading psychology can be crucial to a trader having success in the Forex Market. This is something that many novice traders tend to overlook as they are developing their market education. Not possessing the proper “trader mindset” can result in a negative and costly experience while trading in Forex.
An invaluable tool in trading is being able to recognize the psychological causes of trader actions. In order for us to correct our short comings and minimize the losses that are suffered when trading, we must first identify the problem and recognize the issues surrounding it. Forex trading success is a combination of prudent money management, appropriate capitalization, proper trading strategy, and possessing the proper trading mentality. In order for a Forex trader to be truly successful in his trading, all of these factors must work together in harmony.
Here are some examples of common psychological issues a new trader might face:
Fear of taking a loss:
A trader’s ego can play a huge role in his actions. More often than not, this is the cause of a trader being afraid to get out of a losing position. Not willing to admit a mistake, the trader tries to go against market trends in order to beat the market, but often finds himself incurring even greater losses.
Getting out too early:
Beginning traders often exit a market position prematurely. This is usually because the trader lacks confidence in trading. Mainly to relieve himself of the anxiety of holding his market position, the trader exits his position before he should.
Knowing When to Walk Away:
This happens in either of two ways. One, the trader doesn’t recognize when the market is turning because he gets too excited over the initial success of his market position and by holding onto that position, he ultimately takes a loss, or a much smaller profit. This is a case of overconfidence and general inexperience with market swings. The other way is because a trader refuses to acknowledge that he’s made a mistake. He holds on to the losing position hoping things will turn around and correct his mistake. Again, this is due to ego.
The thrill of making profits can be very addicting. Some traders feel euphoric when they make a good trade. The danger with this is that a trader may seek out this thrill with no consideration for potential losses.
Traders feel this way because they think that they are being victimized by the market. In reality, the trader put himself into this situation and perhaps it is a result of starting out with unrealistic expectations.
Guilt feelings in making excessive profits:
Though uncommon, traders sometimes feel guilty when they making excessive profits due to poor self esteem. They believe that they don’t deserve the profits they make and thus, limit themselves to how much they allow themselves to earn.
Second guessing your trading strategy and over-thinking your positions:
This is the result of wanting a “sure thing” in a world of uncertainties. Traders often fail to understand that losses are a part of Forex trading, choosing to disregard the risk inherent in any and all investment ventures. More importantly, in Forex, it is the “end of the day profits” that truly determine success.
The human mind is the most difficult aspect of Forex trading to overcome. There is no short cut to this except through realization, and coming to terms that we all are human and are prone to mistakes. Once we can recognize this, we can begin to watch out for these “undesirable” mental blocks and take the proper steps to eliminate them.