What to look out for when trading forex series
PART 3: TRADING PSYCHOLOGY
Some of the best traders in the world sharpen their skills through discipline and practise. We know that the forex market has its ups and downs, and stepping into the world of forex trading could be quite challenging, especially for new traders.
In this article series we are exploring what forex traders should look out for when making their first of many steps in one of the world’s most liquid industries. In our previous articles we discussed the first two which are: Stick to your trading plan and Choose a trading partner that cares. Today we are going to take a deeper look in the importance of trading psychology and how that might affect our chances for success.
A lot has been said about why patience and discipline are crucial elements in the success of a trader, as well as a consistent trading strategy . The question to ask yourself though is how?
How could a trader be more disciplined and patient?
We all know that emotions affect our trading decisions. The key to mastering the two ingredients would be to primarily organise the market analysis process into sequential steps that would engage both:
The RIGHT side of your brain (Emotional, Creative, Imaginative)
And the LEFT side (Logical, focused on facts, Math orientated)
As a trader you need to understand that the success of your trades are not dependent on a single trade. So stick to your trading plan, even if you are on a losing streak.
Human psychology includes thoughts and feelings that can negatively affect our trading decisions. Emotions such as
ANGER
FEAR
GREED
EGO
These feelings are particularly popular amongst new traders being overwhelmed by fear. Therefore managing these feelings is parallel to successful trading.
The success of your trades can be broken down and attributed to approximately
10% STRATEGY
30% MONEY MANAGEMENT
60% PSYCHOLOGY
Thats is why you need to make sure that you have tamed your psychology, organise your process and analyse the market.
Trading usually revolves around the traders mental state, beliefs as well as thinking patterns and emotions. The emotions can cause you to deviate from your plan. The two main emotions are
FEAR
GREED
Greed makes you try and squeeze more profits out of a single trade than your plan accounted for. By doing this your trade will not close at the predetermined profit level allowing the possibility for the price to retract back to your entry point or lower.
An example of FEAR would be if you closed a trade before your target profit - whilst you are only a few pips in profit - because you fear that your trade will reverse and leave you with a loss.
EGO is another factor to consider. Some traders want to always be right, and that's where EGO kicks in. So if your trade moves in the wrong direction, you may not want to close the trade because that proves that you have made a wrong decision. Therefore being forced to close at a loss might cause you to deviate from your trading plan in an effort to get your money back. This behaviour is called REVENGE TRADING.
Therefore a trader’s success depends on discipline and following their trading system. A strategy with a 100% winning ratio is unrealistic and you must be prepared to take some losses.
To minimise the effects of your emotions:
- Practise with a demo account
- Trade with a tested strategy
- Be prepared by researching and reviewing analysis
- Accept the risk
Remember, controlling emotions is vital to your success.
