Forex trading psychology is, according to many traders the single biggest thing holding them back.
But what do we mean by psychology?
I’m not a psychologist here, but I’ll attempt a definition for traders:
Forex trading psychology is your mental state:
What you think and feel while you’re trading.
These thoughts and emotions make you take (or not take) actions which lower your profitability.
For example, taking profits too soon, because you’re afraid of losing what you’ve gained so far (when price is likely to keep moving in your favor).
Or moving your stop loss when price moved against you because you feel the market will “move back”.
Even if you have great analysis, a perfect setup, and a good entry…
There are many, many ways a trade can go wrong once it’s on.
And they all have to do with how you manage your thoughts and emotions --so you don’t do something dumb.
Note: I’m defining “something dumb” as anything less than optimal, according to your own strategy.
Forex trading psychology sounds like bullshit.
But bear it with me.
Studies have shown that most people prefer a sure win to a sure loss.
To this point, Daniel Kahneman won the Nobel Prize in Economics for his work in behavioral economics.
An interesting finding of his was that people are less likely to take risk when they’re winning, and more risk-seeking when losing.
This explains why most traders have difficulty letting profits run. There’s this little voice in the head saying: “get yo’ money, NOW”.
On the flipside, when you’re losing, there’s another voice saying: “I’m already down, so why not double down to see if we can get back even?”
This is human nature.
Going back to high performing traders. These guys have trained themselves in the art of doing the OPPOSITE.
High-performance traders let their profits run, and cut their losses short.
In essence, they prefer a sure (but small) loss than a “could break even” gamble.
They also prefer a “will likely continue to move my way” gamble than a sure (but small) win.
That’s right, great traders think and act differently.
They have become experts of themselves.
It isn’t that those voices don’t keep coming up, they do.
But it’s what traders do afterwards that counts, really counts, for their accounts (see what I did there?).
Thus, working on your forex trading psychology is super important.
In fact, if you neglect this aspect, the likelihood of you becoming a sustainably profitable trader are close to none.
Before we go over how to improve, is
What makes psychology a powerful determinant of performance in trading is how the human brain is wired.
We are all human.
With excessively small exceptions not worth talking about, all traders have to deal with the same types of thoughts and feelings.
You will feel and think very similarly when you’re losing, regardless of what security you’re trading.
Similarly, you’re bound to fall prey to cognitive biases like overconfidence when things are going well, regardless of the market you’re trading.
True, each market has its own kinks, but for the most part, dealing with your psychology will be a very similar process across the field.
So with that out of the way…
Forex trading psychology isn’t something you’re just born with and that’s the end of the story.
While you can’t change your thoughts and emotions (effectively), you can learn how to manage them better.
The first step is knowing.
You have to know what you’re feeling or thinking no?
Otherwise, you’re screwed.
You’re losing a ton of money by trading angry.
You’re in the wrong place right now…
But you’ll keep doing so if you don’t recognize this fact: trading angry leads to loses.
So you have to know you’re angry. Recognize you’re angry.
Next, you have to accept the anger.
Don’t try to change it, or suppress it.
According to empirical evidence, suppressing takes a lot of energy, and ultimately, doesn’t work.
So don’t try to hide the thought or emotion.
But you need to distance yourself from the emotion, and not let it run your behavior.
Take a moment to step back.
Only perform an action once you’re sure it’s the right thing to do, and not because you reacted to your feelings.
You might say this sounds silly, and not as helpful, but you’d be surprised.
In fact, you need to take this a step further.
You need a trader log.
Write down all your trades, results, and include your emotions and thoughts in there.
This way, in time, you’ll be able to look back at the log, and identify which emotions and thoughts are less than useful, and which help.
You might be surprised.
What if you find yourself losing when you’re confident and happy?
Maybe you’re letting the ego, get in the way of trading.
You should already have a trader log to begin with (to see areas for improvement, and strengths to double-down on), so go ahead and add information about your mental state.
With time, your forex trading psychology will improve.
And so will your performance.
Better performance leads to more profits.
Which brings us to another important change you need to do:
Separate outcome from process.
You can’t control the outcome of your trades, but you can control your process.
In other words, you should focus on the actions you do control.
If you did everything you had to do, and you did it well, then the outcome doesn’t matter.
Over time, you will rake in the cash!
Contrast that to someone who got lucky for a few months.
That person thought he was at the top of the world.
Noup. Market changed, your process sucks, you won’t make it, sir.
I don’t know about you, but I sure as hell prefer to be the first one.
You need to pay attention to your thoughts and emotions while trading.
Don’t let them run the show.
Take a break, breath, or do anything which will help you slowdown and think things through.
Keep a trader log and include forex trading psychology information for each trade.
This way you can go back and see what you can improve on.
See you soon,
The Forex Economist
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