Trading psychology is the most overlooked aspect of the forex market, which is why it has the highest failure rate.
Therefore, I decided to share one important point on forex trading psychology.
Let’s get started.
Since we were children, we have all tried to win at everything. We’ve never been able to accept defeat gracefully. Even if you grudgingly accept loss, all you do is point a finger and blame someone or something.
For example, think about our job.
When we take the job we do, we are always used to working there until we get the desired result.
For example, if we take a software developer, he will do his best to develop that software in a way in which he envisioned it at the beginning. Also, a graphic designer wants to design and finish as he envisioned it at the beginning as well.
So, we live with that mindset throughout our life and then we decided to trade forex or stock to generate side income or to generate a full-time income from trading.
As you already know, Trading is a high-reward, high-risk activity. Many people know this before they start trading, yet all they want is a High-Reward.
They do not give much importance to high risk. Because they think that they can trade without any loss. Loss in Trading is something that is common to all, something that all people inevitably face.
We can not face these trading challenges with the mindset we have and practised for so long. Therefore, when trading we need to switch to a separate mindset.
So when we trade with the mindset we are accustomed to, we do everything we can to avoid losses.
Most of the traders give a lot of importance to find a trading strategy with a higher win rate. Having a strategy with a 90% win rate is useless if we are not trained our minds to take a loss.
Since we are not used to admitting that we have made a mistake, we will lose the same 10% to the market again with Profit + trading capital to find all the 10% that was lost. In trading, we call it revenge trading.
We somehow increase our chances of losing our trading capital when we try to prevent losing trades.
Why does our mind try to avoid losses?
Here is the thing. Humans have an awesome defensive mechanism.
For example, when a dog tries to bite us while we’re on the road, we’re trying to scare him by throwing a stone at him.
If something is thrown at us while we are standing, we try our best to avoid it, right?
We do not do these things on purpose. These are things that happen instantly. These are also called quick reflexes.
So, our minds also act the same way. When we are in an opinion that we strongly believe in, all the information outside that opinion is avoided from our minds.
Let me give you an example to make this easier to understand.
The best example is that many people bought bitcoin at a higher price last year, anticipating that the price will rise further.
But, remember, that didn’t happen?
Then, what happened?
Bitcoin just had a strong crash after reaching 60K USD. At that time lots of traders were eagerly waiting for bitcoin to hit 70K or 80K USD.
Now those traders who had high expectations of bitcoin were in pain because what they strongly believed didn’t happen.
Imagine a trader who bought bitcoin at a higher price. That trader is eagerly anticipating the price of bitcoin to start increasing after he bought it. When he was looking at the charts, a series of strong bullish candles appeared out of nowhere.
That trader then thinks to himself, “OK, here it is. Now the price is going to rise.”
Now he is a happy trader. 😎
But then, almost out of nowhere, a series of bearish engulfing candles appeared. Now he is panic and trying to figure out why the market always goes against me when I place a trade.
He is in pain and scared about his profit at this time.😥😣
While he was waiting anxiously, a series of bullish candles began to appear, and he thought to himself, “Ok, I knew it, now it’s going to shoot to the moon.”
So again what happened, the price started to move down.
Now think about the mind of that trader. He had “Should”, “Would”, “Could” though on that single trade. That is a lot’s of faith to put on a single trade.
Finally, due to his higher expectation of a single trade, he ended up mess up with his emotions.
So, when this cycle repeats for some time, there is a situation that comes up where that trader can’t make up his mind to lose even $1. Most of the time, when this situation arises, lots of traders ended up closing with a little bit of profit or close with a larger loss.
So, as soon as he closed that trade and erased all the drawings from his chart, his mind started to look at that same chart in a fresh way.
So, instead of attaching to the expectation that the price will start to go up at any time, when he looked at the charts with a fresh perspective, he started to notice that there was a strong downtrend and say to himself, “Shit, There was a significant downtrend, How did I miss it?”
So, why didn’t we see this earlier? What is the reason for this? Is it our mind or is the market playing with us?
This happens because of the attachment. Since that trader was long in the previous trade, He is only focusing on the price action to move higher. Therefore a bullish candle or series of bullish candles will increase his expectation on that particular trade. Also, those bullish candles reduce his pain as well.
However, his pain increased when a bearish candle or sequence of bearish candles appeared. As a result, his mind refuses to focus on bearish candles, or, to put it another way, his mind does everything it can to avoid painful information.
This is a normal and common thing among humans and that how our brain is wired to work with painful information.
Contrary to this, when we are in a profitable trade and when the market is move in our favour, our minds started to avoid all the painful information. Therefore when you’re in a profitable position and when the market suddenly started to move against you, you do everything you can to protect that unrealized profit instead of letting the trade play out.
As a result, you ended up with a small profit. That is because of fear. One of the most important trading psychology factors you should focus on managing when you are in open trade.
So, what is the end result of these kinds of situations?
The end result is, you ended with a small profit and the market continue to move in your direction and you’re sitting in front of your computer thinking about how much money you could have made if you had allowed a little bit of room to play that trade.
When situations like these occurred, most newbie traders don’t even care about trading disciplined, trade plan, risk management and money management. Simple they are gambling.
This is what we called Perceptual Blindness in Trading Psychology.
I hope you understand what I mean in this article. Yeah! It is tough to understand this in the first reading.
However, as a beginner trader, this is one of the most vital skills to acquire. Therefore, learn and apply what I’ve taught in this post, and I guarantee you’ll see a significant change in your trading.
Again I will remind you that trading is a high-risk game therefore Risk Management Should be the top priority for any trader.
Even though you knew about risk management, you won’t be able to generate consistent gain from the forex market unless you’re confident in managing your emotions ups and down.
Trading = 80% Psychology + 20% (Strategy, Technical Analysis and Fundemental Analysis)
With that, I hope you got something valuable from this article.
Please let me know in the comment section if you got any problems and we can openly discuss that in the comment section.