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Psychology of Forex Trading

victoriajensen
Aug 27 2018 at 16:54
1117 posts
Plan your trading according to your strategy and follow that plan in detail, don't trade impulsively or randomly - that alone helps with the anxiety provoked by trading.

camerongill (camerongill)
Aug 28 2018 at 12:43
110 posts
Here are my thoughts on psychology of forex trading...


The biggest battle a trader has is not with central banks, not with brokers, and not with trading algorithms, it is in fact your inner voice and your trading mindset. Many traders burn out due to the fact that trading is an intense psychological battle of fear and greed and trying to preempt market behavior. Don't worry, even professional traders get it wrong more than they get it right!

A great analogy, and as covered in the chapter on ‘Reality of Trading’, is that of professional golfers, only a very small percentage make a rock-star living from it (approx 0.5%) whereas a few have a comfortable lives (approx 1.5%), even more break even (about 12%) and the rest are mediocre and do not make enough money to get on the radar (majority). Same is true for traders and unlike what many forex marketers promote, trading for a living is a tough gig.

Saying that, trading does not prejudice, does matter your race, your religion, your wealth or even your education, all traders are equal and you are pretty much only as good as your last month.

A healthy respect for the markets is essential and you need to take responsibility for your actions - not everyone gets it right all the time and knowing when to fold and cut your losses is essential as the market may not come back in your favor and it is better to take a 10% or 20% loss than risk being liquidated and losing 100%.

Some questions to ask yourself...
How far are you willing to let a losing trade go against you? (what is the maximum level of draw-down you will accept?)
What win/loss ratio do you expect you will have trading with real money?
Are you prepared to stay up staring at screens half the night to wait for a position to come back into profit from loss?
Can you handle stressful situations where markets are volatile and unpredictable?
Do you realize the difference of trading a demo account to a real money live account?

The biggest aid to your trading mindset is a trading plan and this should have if-then scenarios so that the psychological impacts are minimized as you have a pre-defined plan of action.

The core and underlying driver of trading psychology is FEAR and GREED. Trading decisions are made based on either the fear of losing/risking money or the greed associated with making a profit. This is seen all the time in the timing of the exit and entry of a trade and can take the form of entering & exiting trades too early or too late. Self doubt is the byproduct of the fear and greed foundation and is a constant nagging voice in the back of the head of a trader that questions all aspects of the trading psychology.

So the biggest battle faced by a trader is not the large banks, it is not the brokers, it is not other traders, it is not the central banks, it is themselves.

Handling stress is the next major obstacle that traders need to manage. If a trade goes against a trader then of course stress is going to come into the equation, if a trader has full belief in his/her system then of course the faith in the system should reduce the stress levels applied, however due to the uncertainty of the markets there is always going to be some level of stress, especially when the trade size and consequent risk is applied.

LikeMustard
Aug 29 2018 at 14:19
10 posts
Great comment. I found it very helpful. I will trade a bit differently now

LongVision
Aug 29 2018 at 14:41
254 posts
camerongill posted:
Here are my thoughts on psychology of forex trading...


The biggest battle a trader has is not with central banks, not with brokers, and not with trading algorithms, it is in fact your inner voice and your trading mindset. Many traders burn out due to the fact that trading is an intense psychological battle of fear and greed and trying to preempt market behavior. Don't worry, even professional traders get it wrong more than they get it right!

A great analogy, and as covered in the chapter on ‘Reality of Trading’, is that of professional golfers, only a very small percentage make a rock-star living from it (approx 0.5%) whereas a few have a comfortable lives (approx 1.5%), even more break even (about 12%) and the rest are mediocre and do not make enough money to get on the radar (majority). Same is true for traders and unlike what many forex marketers promote, trading for a living is a tough gig.

Saying that, trading does not prejudice, does matter your race, your religion, your wealth or even your education, all traders are equal and you are pretty much only as good as your last month.

A healthy respect for the markets is essential and you need to take responsibility for your actions - not everyone gets it right all the time and knowing when to fold and cut your losses is essential as the market may not come back in your favor and it is better to take a 10% or 20% loss than risk being liquidated and losing 100%.

Some questions to ask yourself...
How far are you willing to let a losing trade go against you? (what is the maximum level of draw-down you will accept?)
What win/loss ratio do you expect you will have trading with real money?
Are you prepared to stay up staring at screens half the night to wait for a position to come back into profit from loss?
Can you handle stressful situations where markets are volatile and unpredictable?
Do you realize the difference of trading a demo account to a real money live account?

The biggest aid to your trading mindset is a trading plan and this should have if-then scenarios so that the psychological impacts are minimized as you have a pre-defined plan of action.

The core and underlying driver of trading psychology is FEAR and GREED. Trading decisions are made based on either the fear of losing/risking money or the greed associated with making a profit. This is seen all the time in the timing of the exit and entry of a trade and can take the form of entering & exiting trades too early or too late. Self doubt is the byproduct of the fear and greed foundation and is a constant nagging voice in the back of the head of a trader that questions all aspects of the trading psychology.

So the biggest battle faced by a trader is not the large banks, it is not the brokers, it is not other traders, it is not the central banks, it is themselves.

Handling stress is the next major obstacle that traders need to manage. If a trade goes against a trader then of course stress is going to come into the equation, if a trader has full belief in his/her system then of course the faith in the system should reduce the stress levels applied, however due to the uncertainty of the markets there is always going to be some level of stress, especially when the trade size and consequent risk is applied.

Very well said.

The market will trade through it’s path of least resistance .
pmichael
Aug 30 2018 at 12:48
10 posts
A very good post @camerongill. Thanks for sharing here.

KurtSung (KurtSung)
Sep 03 2018 at 10:59
12 posts
@camerongill
My respect. It is such a good one!

Discipline rules, not emotions.
TeraPips
Sep 03 2018 at 13:40
19 posts
Totally agree with you man. Very good post indeed.

LikeMustard
Sep 03 2018 at 14:41
10 posts
Is trading psychology really that important? I place much greater importance to money management and strategy optimization

LongVision
Sep 03 2018 at 14:56
254 posts
LikeMustard posted:
Is trading psychology really that important? I place much greater importance to money management and strategy optimization


Trading psychology is most important part of trading because when money is involved human become emotional and a trader unable to execute his trading plan 100% due to greed and fear. If you can not execute your trading plan due to your psychology then even a robust trading system will fail to earn money for you.

The market will trade through it’s path of least resistance .
TeraPips
Sep 16 2018 at 06:22
19 posts
LikeMustard posted:
Is trading psychology really that important? I place much greater importance to money management and strategy optimization


I agree with @LongVision
Trading requires mind, unfortunately mind can be easily distracted in many ways. With such distractions affect the trades badly. So it's important to have sound psychology. You will need emotionless mind so that you won't be distracted with that you FEEL, clearing out the way to decide whatever your strategy says so. Though it's not possible to be completely emotionless but one must avoid greed, fear, anger, laziness, hurry, stress, revenge...

Your son didn't do anything wrong but if you're angry, he will be upset. Your brother didn't do anything wrong but if you're greedy, he started to hate you. Like it or not, trading is your spouse. 😁

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