Forex Trading Psychology is a key factor that differentiates consistently profitable traders from rookie forex traders who make the same mistake over and over again.
Learning how to manage your emotions in forex trading is a crucial skill to master and this is important as your trading strategy and risk management.
Okay. Let’s get start things by reviewing the 6 questions listed below.
- Are you jumping from one system to another system too often?
- Do you get panic or worry after having one or more losing trades?
- Do you get too excited from a profitable trade?
- Are you always looking to fine-tune your trading strategy, trade entry or trade setup?
- Do you have a habit to watch youtube video or reading blog after having a rough trading day to find out what was happened to you?
- Do you adding to your losing trade or widening your Stop loss without accepting the losing trade?
If you find that all of these issues or one or two issues are valid for you, that means that you have a trade psychology issue that prevents you from achieving trade success.
So how do you get over this? The only way to get over this is by Mastering Trading Psychology.
In this article, you will learn how to manage emotions in forex trading that prevent you from growing as a profitable forex trader.
Specifically, this is what we are going to learn,
- What is trading psychology?
- How to manage emotions in forex trading?
- Common emotion problems
- How to manage these emotional problems
- How profitable traders manage their emotions
- Tips on mastering trading psychology
- Trading in the Zone by Mark Douglas
The way trading psychology impacts on traders are different from one trader to another. It is based on the trader’s personality.
So before even think about managing emotions in forex trading and stay discipline in the market, first let’s find out what is your personality when it comes to the world of trading. For that, we are going to use research did by Dr Van K. Tharp.
There was research did by Dr Van K. Tharp on trading psychology. From that, he found out different personality types of trader based on how they trade and managing their trading environment.
These type of traders mostly focus on organizing things like keeping a clean trading journal, record their decision-making process in journals hoping these would help in future. Due to their fastidious attention on these things, they ended up paying less attention to making profitable traders.
These type of traders are kings when it comes to adapting as the market conditions are changed and ultimately this can lead to profitable trades. Also, traders categories under the Administrative Trader type has strong decision-making capabilities as well.
These traders differentiate from other traders because of their intuition and creative thinking. Due to their creative mind, these type of traders leans to be more flexible and can adjust to ever-changing market conditions like the administrative traders.
Traders categories under this are typically open-minded and have a flexible approach to their trading activities. These traders know how to respond effectively to the information that the market provides. These traders are typically good analysts and they are prioritizing market data to make sound trading decisions. These traders tend to take a notable risk and some of the most successful traders falls under this category.
These traders use logical judgment and prudent analysis and often keep detailed notes on their trade and reasoning for taking them. Basically, these traders are comfortable for waiting too long to take quality trades. Traders with this trading personality ended up resulting in lower returns.
With a serious approach to the trading day these type of traders prefer to trade in a social environment or interacting with other traders. These traders focus on observing a big picture of the market and make well decisive trade. These traders are well organized.
Just like the facilitative traders, these traders also includes a degree of social interactions when trading but unlike the facilitative traders, these have a playful approach to the market. These traders view their position positively and optimistically but due to their social interaction and optimism, they’re often caught in trading emotion side of problems.
These traders prefer to use their own data interpretation and, when trading, behave independently of the crowd. Although their ability to think outside the box can result in profitable trades, they are poor team players because of their lack of social skills.
Innovative traders tend to be able to process and react quickly in the market with large amounts of market information. These traders also have ability to analysing and reacting to market conditions. Also, these traders tend to be good leaders.
These type of traders have a good reputation when it comes to making trading decision effectively. Also, planning traders tend to be more organized and realistic. To make sound decisions, they prefer to focus on facts and they can adapt quickly and flexibly to new trading conditions by implementing new trading systems.
These traders tend to be faithful to social values that they consider essential and enjoy a social life. As traders, they appear most effective when a trading opportunity that is compatible with their principles presents itself.
These Traders think and react to the market condition very quickly even they are not focusing on much analysis side of thing. When it comes to their trading strategies, they will find planning and following through difficult.
These type of trader are all-rounders. They are good in practical, realistic, well-organized and decisive when it comes to placing positions. Not only that, when the market is about to shift from one condition to another, these type of traders can quickly adjust to that situation. They are good at seeing the big picture also these traders can understand the complex situation quickly.
These traders tend to support for successful traders or play support role within trading teams. These traders tend to be insightful and solemn.
This type of trader appears to be independent and to concentrate on the material benefits, ideas and interactions of trading. they can also make decisions well and can see the bigger picture. They will become successful as traders if they can get beyond their emotions and value system.
Now we identified 15 trader personality types based on Dr Van K. Tharp research.
Now It is your turn.
To be honest with yourself and try and figure out what category you’re going to fall in, let me also know which category you fall in the comment section, and why?
You now realize that trading psychology is heavily based on the character of traders. You also now know which area you fall and what kind of trading problem you may have by reading 15 types of trader personality, right?
Okay, Next let find out how to manage our emotions in forex trading and stay as a disciplined trader.
What are the skills that define a successful forex trader? Is it having expertise in market analysis or having ample knowledge about forex trading?
Yeah! with that two include there is another important aspect is missing here. Any guesses?
You may know a thousand effective trading strategies and you may be good at using all the trade indicators out there, but if you don’t focus on handling forex trading emotions, then you’re going to have a hard time making profits in forex.
Owner of the Trading Composure Yvan Byeajee says,
“Confidence is not “I will profit on this trade.” Confidence is “I will be fine if I don’t profit from this trade.” – Yvan Byeajee
What he said is true. From that quote, he showed what is the real meaning of the confident in trading.
Assume that you are in a trade with predefined risk. You place the order and after a few minutes or hour, price is moving against in your favour and the market keeps on moving deeper and deeper against your favour.
Think about what kind of errors you may end up making in a situation like this.
- Maybe you will widen your stop-loss hoping that the market will turn and move again in your favour.
- Maybe you will take trades on other pairs just to gain money that you lost on that trade. That is called revenge trading.
- Maybe you will keep on adding that trade more.
All these psychological issues occur because, in the market, you don’t know how to manage your emotions up and down.
Next… Let’s take the most common trading psychology problems that forex traders face when trading forex and how to manage those emotional trading mistakes.
The general definitions of greed – excessive desire for more of something than is needed.
In forex trading expecting a higher return is the worst mistake you can ever do in your trading career. Greed prompts you to take trades continuously without realizing that the market will be open again tomorrow. So as a result of this trading behaviour traders often ended up fall into overleveraging and overtrading.
Basically, when you are trading greedy, your decision-making process and trading judgment become cloudy and resulted in lots of trading mistakes.
SO, How to overcome greed,
To overcome greed, you have to stay disciplined. Simple as that. You have followed your trading plan accordingly without breaking any trading rules on it.
Also, you have to admit and accept that you won’t make the right call every time. There will be times where you will not capture the complete move of the market or times when you will totally miss a nice setup.
But that is the reality of trading forex. The faster you accept the truth the faster you will become successful in trading.
From a psychological point of view, fear and anger often ready you for physical exercise. This momentarily modifies the psychological mechanisms, such as heart rate and blood pressure.
But when it comes to forex trading, this can also cloud your trading judgement and you may not be able to make decisions confidently.
In forex, fear comes from losing your trading capital and fear of losing money is common for any trader and for the beginner forex traders this is even challenging.
Assume that you had a two losing trade in a row and at the moment, you are also holding a position on GBPUSD and this trade on GBPUSD also keeps on moving against in your favour. Now you are panic and since you don’t want to lose more money you ended up closing your trade early.
Guess what happened next?
Price turn and move in your favour and if you did not close that trade earlier, you’ll end having a profitable trade in your hand.
So what happened in that scenario? You were experiencing fear. That is why you do not let the outcome of the past trade interfere with future trades.
Just like the Fear and Greed in forex trading, Revenge trading also have devastating consequences. So what is Revenge Trading?
Simply put, Revenge trading is when a trader attempts to win back losses by entering into a larger and often more risky trade. This type of trading behaviour is driven by fear, anxiety and frustration and it can affect one’s trading career very badly.
Luckily overcoming from revenge trading is also achievable just like the fear and greed. To do that first, you need to learn how to handle both profitable and losing trade in the same way.
Forex trading is not about profit from every trade, it is more about managing losing trades and maintaining a good risk to reward ratio. Losing a trade is inevitable, it happens to everyone. The sooner you grasp this truth the easier it will be to achieve trading success.
Whenever you feel like you’re losing trade, learning how to accept and deal with losses is the secret to going forward.
Another great way to remove anxiety from a losing trade is to take a short break. That is an effective way to clear up your mind, especially after a bad trading day. The best thing in a situation like this is to focus on an activity completely unrelated to forex trading. Something as simple as taking a short walk will do a trick.
According to psychology, “Euphoria is a feeling of happiness, confidence, or well-being sometimes exaggerated in pathological states as mania.”
So how this affects to forex traders?
Think about how you feel after a winning streak of trades or single large winner. It builds exceedingly positive sentiment and confidence in your mind, right? With that mental state, you’re often drawing to take many new positions, usually like the previous trade, which however can end badly.
This is called Euphoria.
Because of Euphoria, Lots of forex traders, especially new ones ended losing consistent profits that they earned from the previous trade within just one trade. This bad, right?
So, How to avoid this? Simple, You just have to treat both winning and losing trade the same way. That way you can stay in a linear state of mind and can easily avoid emotions ups and downs in forex trading.
How hope is preventing you from achieving success? Think about for a moment, How can we keep hope on something we don’t have control, right?
Forex market is always changing, Know one knows when it is going up or down. The only thing we are doing in forex trading is the bets on probabilities.
You have to understand this. Trading is a game of numbers and statistics, not a game with your gut feeling and hopes.
When you have a losing trade which moves against you, the hope can easily rise and you ended up making trading mistakes such as widen your stop hoping that price will move in your favour or adding to a losing position to gain more if price moves in your favour.
This can be work ones or twice, But in a long run you will surely end up blowing your trading account.
The simple solution here is to adhere to your trading plan- Don’t break any rules, follow your Risk and Money management plan as it is and understand that trading success is not a linear and an easier path, you need to face obstacles and overcome those without involving any emotions.
Boredom is a result which arises because of the lack of focus.
Have you ever found yourself going through the same currency pair and different time frames not having a clear idea of what to do?
This is a clear sign of boredom, and if you are found your self in such a scenario take a break, go for a walk and when you feel you are focus again then come back and trade. This is simple, right?
The real trading is boring, that is how trading work. No one can force the market to move fast, right? The challenge here is to stay focus on such a boring environment.
The easy way to achieve this is to focus on your trading process and stop staring in front of charts all the time.
So, These are for main effected emotional problem among the forex traders. The early you identified these emotional problems bury inside you, it is easier to manage and overcome these problems which eventually leads to profitable trading.
So far we learned about that trading psychology is heavily based on trader’s personality and found out your trading personality type by taking 15 traders type and just now we talked about 6 main emotional problems among traders and how to overcome these problems.
Next, Let’s talk about how successful forex traders manage their emotions in trading.
In his book, Trading in the Zone, Mark Douglas start by telling why traders shift their focus from Fundamental analysis to Technical analysis and finally from Technical Analysis to Mental Analysis.
He knew that Mental analysis plays a huge role even if you had the best trading strategy and trading techniques out there.
Also, he compared consistence winner and everyone else to Earth and Moon. Both earth and moon are celestial bodies, right? But they are different in nature and characteristics as night and day.
Just like that anyone who puts trades on their trading platform can claim to be a trader, but when compared to the characteristics of the consistently profitable trader with the characteristic of other traders, they are also like the night and the day.
So what is the difference between these two groups of traders? It is how their attitude and the way they think.
Here are few tips from successful trader on how to manage emotions in forex trading.
- Use small position size in the drawdown periods.
- Use a journal to record and review your trading performance. That way you can focus more on the trading process rather than rely on a single trade outcome.
- Be selective when choosing the market. Always go for the markets environment where you have an edge.
- Focus on activities unrelated to trading when you have a bad day or losing streak.
- Only get involved with the trades you are comfortable with losing it.
- Never take trading decision with candles that are not closed yet. No one knows how these candles are going to close. Keep in mind that, the way candle closed is important at the end of the day.
Learning is essential for our existence. Just like foods nourishes our inner bodies, information and life long learning nourishes our minds. Especially when it comes to trading forex, keeping our mind shape should be our top priority.
Learning trade strategy, managing risk and maintaining money and right position size is easy and those things are constantly getting polished as we keep on trading.
However, to keep our minds shape and manging emotions in forex trading we have to put little extra effort.
So how to keep our mind shape. The best thing is to read books. What books? Books related to trading psychology.
The best book and my favourite one is Trading in the Zone by Mark Douglas.
In this book, Mark Douglas reveal the underlying reasons for lack of consistency and help traders overcome the intrinsic mental habits that cost them money. Add this to your read list this is a must-read book for every trader.
Another great book is The Art of Thinking Clearly by Rolf Dobelli. This book includes 99 chapters. Each of these chapters provides examples of psychological pitfalls everyone – not just traders – can fall into. Everyone who read this book ended up learning something new about their personal development and growth.
Here are some of the must-read books for you if you really have a burning desire to achieve trading success.
- Reminiscences of Stock Operator by Edwin Lefevre
- Market Wizards by Jack D Schwager
- Psycho-Cybernetics by Maxwell Maltz
- Market Mind Games by Denise Shull
Now it is your turn,
You already know that trading psychology plays a huge role in ones trading success. Believe it or not, correctly managing emotions in forex trading is the defining factor of a successful trading career. Hence just like you focus on your trading strategy make sure you give more focus on trading psychology and trading disciplines.
Speak of trading disciplines here is a great article about trading habits that help you a lot to behave discipline in the forex market.
Related Reading – 8 Forex Trading Tips to Become a Better Forex Trader Right Now.
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