Trading Psychology In Forex
Can trading and psychology be considered as one?
Trading Psychology is known as the emotional and mental state of a trader. The behaviors that drive your decision-making process within the markets.
It’s crazy how every decision in our lives play unique roles in the way we experience life in the future. Who would have ever imagined that our environments, our circumstances, the energies around us, and even the habits we adopt as children would make such an impact on the way we live, think, perceive and execute the simplest of tasks?
Think of it this way; imagine the reaction of a child who touches a hot stove after being told not to – with this there are lessons to be learned. Psychologically the child’s brain reacts by alerting the child that it is dangerous, and so the child may never do it again or at least not on purpose.
The idea that our experiences impact our psychology when it comes to trading sounds absurd to some people because trading psychology is probably 99.99%, of the time, not the first or second aspect we are taught when learning how to trade because it’s the endless possibility to profit from trading that entices us to begin with.
What shapes our psychology?
The environments we grow up in and find ourselves in consistently and our habits affect our ability to stay focused and take a disciplined, consistent approach towards the markets and how we trade, based on our perspective. Research done by Barbara Aria shows that on average a child hears the word ‘NO!’ 400 times!!! You may be wondering why this is important?
This study showed that the more a child heard ‘NO!’ they grew more and more disconnected, emotionally, and that for some children it was harmful. It denied individual expression. As children we are all curious and as fascinated by anything without knowing its impact and so the more we hear the word ‘NO!’, one of 2 things happen; for some they either lose their sense of curiosity and for others it drives their curiosity.
To further understand the state of our trading psychology we need to understand ourselves and our behaviors, elements such as our risk appetite.
This is also known as self-awareness. Our trading psychology requires that we do a mental analysis on ourselves, this includes us understanding fear as a natural reaction to anything we may perceive as a threat, and overcoming greed – tackling the feeling of needed to do better to prove a point and placing your ego aside. Rising above it.
When you decide not to focus on your trading psychology you place yourself at great risk because according to my reading in Mark Douglas’ book, Trading in the Zone, 95% of the errors in your trading as a beginner will stem from your attitude about being wrong, losing money, FOMO and leaving money on the table (aka – greed).
However, there are tricks that can help you develop. The same way you exercise a muscle for it to grow, you need to exercise your mind by exercising discipline and but containing your emotions. To do this you need to adopt a trader’s mindset and a trader’s attitude.
This is a winner’s mentality – an attitude that allows for traders to have the greatest degree of mental flexibility to flow in and out of trade opportunities. This requires that we remain present and focus on trading in the moment because every moment is significant.
If you are able to manage your expectations, and let go of the need to know what will happen in the future by focusing on the piece of information in front of you, over time your ability to perceive the markets objectively will increase and it would help in your confidence.
‘How?’ You may be asking – this is simple, when you blame the markets behavior for a lack of consistency without a strategy, you are giving the market power over your psychological being. But when you take bits of information as it avails itself, and process it as information objectively, you then have nothing to avoid because the information doesn’t affect you psychologically and so it can’t cause you any emotional harm.
It is key for a trader to build a psychological framework for their own trading benefit. No one or two traders are the same and therefore cannot have the same psychological barriers, psychological frameworks or psychological beliefs referring to your internal beliefs that reflect in your attitude and perspective of the Forex market.
The boundaries/framework may include things such as your RR (risk: reward) tolerance and understanding that many outcomes can occur, which should cause you to be flexible and adaptable with ease.
There is a phenomenon known as loss psychology, this is a reaction that occurs with the negative sentiment or outcome of positions placed in the market based off of irrationality and bad decisions that are out of character. This affects your trading psychology moving forward due to it quickly becoming a downward spiral if not noticed quickly.
The problem with not having proper trading psychology, is that you are taught risk management but when taking the risk you often just place trades according to your analysis and not according to what you can afford to risk.
The problem with this is that 1. You may have risked more than you should (so you’re over leveraged) and 2. As our focal point, you haven’t embraced the risk. Embracing the risk help alleviate the pressures and fear of the outcome.
Improving your trading mindset
So now you may be thinking – “this is all great but what does trading psychology look like practically?” I’d tell you that that’s a great question! Honestly speaking, there are many things a trader can do to improve their trading psychology daily! You can avoid loss psychology by doing 3 simple things:
1. Following your trading plan.
3. Learning from losses (you eventually get to the point of realization that the market moves how it pleases).
My personal last recommendation would be to read Mark Douglas’s book, Trading in the Zone, ASAP! Create both a trading log and a trader’s journal respectively. This is so you can track your trades and know when it is time for you to go back to the drawing board. It is important to know what your environment contributes to the way you trade.
So a quick recap on the important aspects of trading psychology; you need to have a winner’s mindset and attitude towards the markets, focus on your mental framework and understand yourself as an individual/trader, embrace the risks that come with the territory, exercise discipline and containing emotions. This practiced over time will improve your trading psychology immensely.
It is said that building your trading psychology is only half the battle. The other half is maintaining it.
So cheers to maintaining trading psychology!