Trading psychology refers to the mood of traders while operating in the financial markets and how this influences their trading decisions. The psychological side of trading is often overlooked. A stable state means that the trader consistently fulfills the plans, remembers the risks associated with it, does not get distracted by emotions, takes equal responsibility for wins and losses, and also treats trading wisely in general. Poor trading psychology is one of the main reasons traders fail in Forex.
Trading psychology can be counted on the same level of importance as other factors, including knowledge and experience.
Two of the most critical characteristics of the trading psychology are discipline and risk-taking, since these two can be vital for the success of trading plan.
In this article, we will be talking about frequently faced trading emotions and how to overcome them for succesfull trading in the Forex world.
Fear, greed, regret, and hope are considered to be the four most important emotions that influence the trader’s performance in the financial world. Unless properly controlled, these emotions can be drivers of emotional decision making and eventually responsible for getting the trader to a place where no trading plan or strategy is anymore followed.
In the financial world, one of the most commonly faced emotions is fear. It can be fear of failure just losing a trade or even losing an entire capital, that happens immediately after placing a trade. This emotion can be a driver of extreme pressure of perfectionism, where a trader worries if the trade goes sligthly against the expectations, causing a trader to close out the positions sometimes earlier.
When this happens, a trader generally overreacts to small movements in the market and it can be not healthy for the decision making process.
Here are some scenarios that can happen if a trader is feeling fearful:
- Closing out winning positions due to short market movements
- Delaying opening positions due to the fear of loss
- Staying in the losing trades due to the fear of taking the loss of the capital
If fear is not controlled properly, a trader is likely to experience feelings of extreme stress and inner conflict. Excessive losses may occur due to a lack of controlling fearful emotions which can lead to making rush decisions while trading.
Greed is an emotion that can cause excessive desire for profits in Forex. This emotion can get a trader to the position where a trader is staying in a profitable trade longer than it is advisable in an attempt to get more profits. Greed affects traders trading plan and strategy and preventing them from acting in rational manner. It can cause one of the following scenarios:
- Overtrading in the desire of making more money and eventually ending up in impulsive trading
- In order to make more benefit a trader may take aggressive risks and abnormally large positions
- With the profit targets that are often unreasonable a trader can have poor money managements, resulting in the indecisions when taking profits or exiting losing trades
If emotion of greed is left unmanaged, it can affect a trader with a feeling of trade-related euphoria and overconfidence, harming the healthy trading mindset.
Regret is an emotion that a trader can feel either because of placing a trade or not placing one. This emotion can tempt a trader to get into a trade after missing out on it because it moved too fast. Eventually this kind of impulsive decisions can lead to trader losing most of its capital. It can lead to the following scenarios:
- Impulsive positions opening and trading decisions
- Exiting a trade in regret of opening one, while it could be profitable
This feeling can cause a trader of having a negative experience in the financial world and forex trading if it is overlooked that no one can grab all the opportunities provided in the market.
Trading that is based only on hope can be considered kind of a gambling. When a position is opened, a trader starts with a trading plan, however ends up with only hope that it will go in their favor. When the trade is going against them, the feeling of hope enters their mind forcing to hold onto losing trades. It can cause following scenarios:
- Not exiting losing positions due to the hope that it will reverse
- Holding onto profitable positions longer than it is advisable
The only way to avoid such scenarios is to recognize this emotion and its consequences in the trading world before it kills off a trader entires capital.
How to Improve Your Trading Psychology?
When someone is aware of their emotions, it can be easy to improve their trading psychology. Once you acknowledge the emotions we have listed above and their final results, you can put a trading plan and strategy that also includes these kind of situations in order to mitigate any negative effect it can have on your decision making process.
In order to improve your trading psychology, it is advisable to:
Identify your personality traits and emotions: Be honest with yourself about your emotions and try to keep them under control while trading
Follow a trading plan: Developing and following a ready trading plan will make you avoid impulsive decisions as it will highlight your time commitments, available resources, risk-reward ratio.
Be patient in Forex world: Patience and discipline is vital while trading. Have patience and trust your analysis. For instance, when you are looking to enter a trade, wait for the right moment and do not get into trades while you are on emotions.
Take a break after a loss: Sometimes when a position did not move in your favor, it is the best to take a break for short time in order to gather your thoughts, instead of action on emotions such as regret or hope.
Know when to quit: You should know when to quit even a winning position. Always use TP, and do not continue winning positions with a feeling of greed or hope. Accept your winnings while you are ahead.
Trading psychology is a crucial part of any long-term trading plan. The emotions we have listed above can cloud our judgment and tempt us to make undesirable decisions.
Psychology is not the key to profit, however it eliminates 80% of the mistakes done nowadays by the traders.
As Nial Fuller has said: ‘’ Trading success is the end result of developing the proper trading habits, and habits are the end result of having the proper trading psychology.’’
Wishing our readers a good and profitable week!