You Need To Apply Some Psychology
To Be A Successful Trader
What is the difference between a successful trader and a not so successful one? Well, you could say it’s luck, but that would not be completely true. Lady luck has some say in every venture, but like any business, Forex trading requires skill, experience and knowledge. However, that is not all, as psychology has its place in the requirements for a successful trader.
There is evidence that even the most brilliant academic minds can fail when it comes to trading. Research into the spectacular demise of LTCM, the hedge fund company that nearly collapsed the global financial system in 1998, indicates that even led by Nobel prize winners they succumbed to the vagaries of greed and euphoria. Being driven by these emotions can also facilitate fear and panic. The combined combination of all of these severely affect judgement, create a “laissez-faire” approach to risk management, and create overconfidence with decision making. These are not the best emotional or psychological aspects for any successful trader.
Technical decisions can be undone and knowledge can be learnt, but experience comes with the analysis of what is undertaken. Success or not, it is a learning curve only if the trader looks to his own behaviour and responses.
This concluding session takes a look at four psychological profiles that can severely impact your Forex trading. Like everything else a new trader needs to learn, knowing your response to situations is important. It is something to be aware of, learnt from, and adapted to if you want to be a Forex trader who attains success and the wealth that goes with it.
When Greed Leads The Way
Greed and avarice are the names of one of the seven deadly sins. It can be understood as the overwhelming desire for material wealth or gain. Most people in today’s society have experienced a feeling of greed and seen it pass, however, it can become detrimental to successful trading. It is usually the passion for making money that drives someone to enter the business world of Forex trading. A dynamic, forward-looking approach is necessary when you are looking to make a profit and be a financial success in this market. It is healthy to be goal oriented and to have a focused approach, as in this business risk-taking can be very high.
What is not healthy, is when greed overtakes knowledge and experience, a problem not just for new traders, but for those that may have become complacent in their approach. The result is that decisions are made on a potential ‘quick buck’ and sight is lost of the discipline needed to trade. Greed is when the desire to trade faster, more widely or recklessly, is what drives your decision making.
For both new and experienced traders, this is often facilitated by a run of profit-making choices, leading to the temptation to stray from a planned approach or to try and capitalise on good fortune by increasing the risk.
So, how can you avoid the traps of wrong decision making that greed can facilitate? You should always recognise when impulse trading is your leading choice and only make decisions based on analysis and reason. Decide on a trading strategy and always stick with it. A logical approach to trading is essential for success, so employ this with the drive to succeed, where the motivation is to make a profit but not to be dictated to by greed. Refine your trading plans with experience and knowledge, so that responses to the market are disciplined and calculated.
When Fear Dominates Decision Making
It is a fine line between adrenaline working for us or against us. When we perceive something as exciting, it often has an element of fear; this increases the physical and psychological responses of adrenaline release. However, these responses can often be misinterpreted, and when they are felt as fear, it creates a knock-on effect that can cause severe damage to the decision making process in Forex trading.
Fear can make any trader question what they are doing. It slows them down and makes them unwilling to commit to a decision, even one based on analysis and study. This creates a tentative, nervous trader who realises more losses than profits. A cycle is then created that can lead to a self-fulfilling prophecy. Fear of making a mistake facilitates actually making them, as the fear leads to increasingly irrational decisions and fewer profitable trades.
One of the aspects that you might see generated by fear in a Forex trader is loss aversion, where traders deviate from their determined plan as prices start to move quicker than anticipated. The trader is scared they will lose money, so doesn’t place the trade. This fear can also occur after a number of consecutive losses, affecting a trader’s confidence so much they stop putting trades or do so at too small a size to make any money.
Fear is a natural human condition, and it can be managed. The first thing is to make sure you are aware of the difference between conservative trading and fearfulness. Being sceptical is a good trait for a trader, so always query, check and analyze what you hear, but still be ready to act when your study indicates a profitable outcome.
Learn the ropes to combat fear and plan in a calculated, logical way. Avoid the extremes and trust your plans. A calm approach is the one to aim for, but don’t forget that your adrenaline is also a useful tool to increase the sharpness in which we see and understand things. Utilise this but don’t be controlled by it. A successful trading career is not random; it is the result of being in control of the choices made through the correct application of information and experience. Always learn from any mistakes, but do not be dominated by them.
Euphoria Is Not The Midas Touch
Every trader has experienced the exhilaration of making that first profit. It’s a fantastic feeling that encourages you and pats you on the back for a job well done. Because Forex trading is the application of study, research, and the skill to use that information, luck does not make profits. Euphoria can cause a trader to become blinkered, seeing only wonderful prospects and limitless wealth, with a total disregard to the logical sequence of research and planning that continued successful trading requires. A trader new to the market may experience euphoria if they have a succession of profitable trades. Unfortunately, while they may consider their understanding and analysis flawless, the reality is that no analysis is perfect. Significant gains can be made, but only when the trader has a thorough grasp of what the Forex market is about. The diligent application of knowledge gained through hard work, and not by a euphoric exuberance, is the only way to success.
The route to avoiding euphoria dictating your behaviour as a trader is by:
- Acknowledge that the next trade may be more profitable, or then again it may not.
- Never let the excitement of a string of profits become all- consuming.
- Understand that each trade, its success or failure, is independent of the previous trading action.
- Don’t just analyse losing trades, but check out the winnings too, as these have a learning curve to them also.
- Keep to your plans however tempting it is to increase your position.
- Stop obsessing about what is in your account. As nice as it is, the time would be better spent preparing your next trade plan.
- Withdraw money from your Forex account into your regular bank account periodically.
Panic Can Be Managed
Panic is that extremely unpleasant feeling when your mind tends to process thoughts and actions in a negative way, and you feel there is no way out. This is not a good emotion for Forex trading, as the perception becomes all about loss with no positive conclusion.
What can cause panic? The primary precursor to panic is market fluctuations, as when these increase in depth and frequency, the value of predictions reduces dramatically. The subsequent loss of confidence in the selected trading positions can trigger an emotional panic response. Leverage and tight stops can also contribute to the increased feeling of panic. These can result in errors in judgement by both rookie and experienced traders.
- Not performing a logical analysis of the situation.
- Getting overwhelmed with potential scenarios.
- Closing a profitable position in the hope it will reverse quickly.
Having a plan to refer to when panic strikes is a logical way to handle this stress. The plan does not have to be complicated but should include marking down your reasons for entering into the trade, the critical levels, and an exit strategy.
Forex trading involves your money. When this is the case, the process is not a neutral one and the outcomes of your decision to trade will have an effect on you, either positive or negative. To be a productive and successful trader, those responses have to have a low impact on your decision making and risk management. An awareness of the emotional impact of trading can help a trader to recognise when an emotional response is affecting their judgement. They are then able to rectify this and stop it spiralling out of control.
Forex trading is about a methodical approach, coming from time spent studying, researching and examining the market. Results are not about luck, but about choices, and what information those choices are based on. To be a successful trader you need to constantly update your information to ensure logical decision making. Time has to be spent on understanding the mechanisms of the Forex market and what events affect the global economy.
As a new trader, you need to find your level of confidence. This course has been about introducing you to the basic concepts of Forex trading and the tools that you can apply to be a successful trader. It is good to remember that while you cannot eliminate emotional responses, you can limit them from harming your trading. Focus on the process more than the profit or loss, keep to your plan, then evaluate and adjust it if necessary. A successful trader never stops learning.
More From The Free Forex Trading Beginners Course
Part 1: Reading A Currency Quote
Part 2: What Are Forex Pips, Leverage, Lots, And Margin?
Part 3: Explore Currency Pairs And Their Different Aspects
Part 4: Fundamental Analysis And Technical Analysis In Brief
Part 5: The Use Of Forex Technical Analysis
Part 6: The Importance Of Fundamental Analysis For Forex
Part 7: You Need To Apply Some Psychology To Be A Successful Trader
Part 8: Finding The Best Forex Broker Online
Part 9: Disclaimer