The Psychology of Forex Trading
Forex Trading Psychology
The Psychology of Forex Trading
I have been a trader long enough to know a thing or two about how most people think while trading the market. You see, most people experience similar thinking patterns and emotions as they trade the markets, and we can learn many important things from the differences in the way losing traders think and the way winning traders think.
I would be lying to you if I said that success in the Forex markets depends entirely on the system or strategy you use, because it doesn’t, it actually depends mostly on your mindset and on how you think about and react to the markets. However, most Forex websites trying to sell some indicator or robot-based trading system won’t tell you this, because they want you to believe that you can make money in the markets simply by buying their trading product. I prefer to tell people the truth, and the truth is that having an effective and non-confusing trading strategy is very important, but it’s only one piece of the pie. The bigger portion of the pie is managing your trades correctly and managing your emotions correctly, if you do not do these two things you will never make money in the markets over the long-term.
Why most traders lose money?
You have probably heard that most people who attempt Forex trading end up losing money. There’s a good reason for this, and the reason is primarily that most people think about trading in the wrong light. Most people come into the markets with unrealistic expectations, such as thinking they are going to quit their jobs after a month of trading or thinking they are going to turn $1,000 into $100,000 in a few months. These unrealistic expectations work to foster an account-destroying trading mindset in most traders because they feel too much pressure or “need” to make money in the markets. When you begin trading with this “need” or pressure to make money, you enviably end up trading emotionally, which is the fastest way to lose your money.
How to obtain and maintain an effective trading mindset
Obtaining and maintaining an effective Forex trading mindset is the result of doing a lot of things right, and it usually takes a conscious effort on the trader’s behalf to accomplish this. It’s not necessarily difficult to achieve, but if you want to develop an effective trading mindset, you have to accept certain facts about trading and then trade the market with these facts in mind…
You need to know what your trading strategy (trading edge) is and you need to master it. You have to become a “sniper” in the market instead of a “machine gunner”, this involves knowing your trading strategy inside and out and having absolutely NO questions about what the market needs to look like before you risk your hard-earned money in it.
You need to always manage your risk properly. If you do not control your risk on EVERY single trade, you open the door for emotional trading to take hold of your mind, and I can promise you that once you start down the slippery slope of emotional Forex trading, it CAN be very hard to stop your slide, or even recognize that you are trading emotionally in the first place. You can largely eliminate the possibility of becoming an overly-emotional trader by only risking an amount of money per trade that you are 100% OK with losing. You should EXPECT TO LOSE on any given trade, that way you are always aware of the very real possibility of it actually happening.
You need to not over-trade. Most traders trade way too much. You need to know what your trading edge is with 100% certainty and then ONLY trade when it’s present. Once you start trading just because you “feel like it” or because you “sort of” see your trading edge…you kick off a roller coaster of emotional trading that can be very hard to stop. Don’t start over trading and you will likely not become an emotional Forex trader.
You need to become an organized trader. If there is something that is the “glue” that holds all of the points I’ve discussed in this part together, it is being an organized trader. By organized, I mean having a trading plan and a trading journal and actually using both of them consistently. You need to think of Forex trading like a business instead of like a trip to the casino. Be calm and calculating in all your interactions with the market and you should have no problem keeping the emotional trading demons at bay.