Phycology in trading forex

  • Feb 23 2022
  • by
  • Analyst AZA
Phycology in trading forex

Phycology in trading forex

Traders have many obstacles to conquer for them to become constantly profitable.

Traders in general not only have to compete against one another but also have to resist some of the behaviors. Since we, as traders are humans, we tend to get emotional and that is natural even though most of the time they work against us. These emotions will lead us to many trading losses until we keep them under control.

It would be highly favorable to the trader to completely exterminate their emotions. Unfortunately, that is not possible, and sometimes emotions can be a tailwind to the trader. Self-knowledge is key to a trader, knowing what you are good at, what you are not so good at, and what trading style suits your personality.

In this article, we will be going through the phycological factors that might be causing erosion to your trading balance and most importantly how we can go about overcoming them. In most cases you find traders having too much confidence in their skills. This kind of trader thinks that their learning journey is finished. They believe that they know everything there is to know and they will simply loot the forex market.

The dangers of this are that this kind of trader is habitual places too many trades or uses too much leverage. The result is a trading account that is blown (account with no trading capital). For a trader to know if they are suffering from over-confidence, they need to question themselves. Have you ever rapidly entered and exited trades more frequently than usual? Have you used more leverage on a single trade than usual due to being too certain it will go in your favor?

If the answers are yes, you need to be more cautious

To be able to overcome this obstacle, it's necessary to construct a plan on how to manage risk and most importantly the discipline to follow the plan. These rules should indicate how many trades will be entered at one time, how much capital are you willing to lose on a single trade, and how much is allowed to be lost before taking some time off the market to re-examine your approach.

In other cases, you find that market participants have extrapolated those markets will perform in a similar way they have done historically. That can result in the inability of a trader to be aware of the fundamental change that might have occurred in the market. when this mindset is adopted, they tend to be emotionally attached to a trend that is ending. They end up opening more trades that are opposite to the new trend that has developed.

The best way to defeat this obstacle is to implement what I call a top-down approach. This means, using multiple timeframes to do your analysis. If you like trading on 15 minutes charts, go to the hourly charts, four hours charts, and daily charts to get an idea of where support and resistance are and what is the long-term trend. You can also utilize short timeframes for entry. Having a broader view will assist in giving you a chance to re-evaluate market conditions

Sometimes you will find that we look for data that confirms the belief we have. For example, if you are long on gold, you will be in search of data or technical setups that confirm your belief. This kind of trading can cause a trader to miss key cautionary signs that might arise, which might lead to substantial losses. when traders try so hard to look for confirmation of what they believe, they end up being blind to what is happening.

Sometimes you have to look for an indication of maybe you might be wrong on a certain decision, then make it a habit to do so because it can prevent you from entering or continuing with a trade that is a loss.

The advisable way to resist this is to engage in group discussions about your trading or chat with a friend. This will be effective if those people are not hesitant on disagreeing with you. Their outputs will give you external perspectives and bring in some versatility into your trading approach.

When a trader has a phobia of losing trades, they are prone to holding losing trades. In contrast, those who are not afraid of losing, can settle for small losses, and patiently wait for other trades with better odds. Big losses can be lethal to a portfolio and also on the phycology of the trader. Traders who experience big losses might take more risks to make up for the loss they took on the previous trade. Fear of losing can even prevent you from participating in some opportunities

If you have ever held on to a losing position for more time than you should have, due to hoping that the market will change direction and go in your favor, you need to be careful of this situation. For a trader to overcome this predicament, they have to apply sell stops and have the discipline to let the market play out without having to interfere. Many are unable to act by a mental stop loss because most of the time emotions get the better of us.

The phycological factors in this article are very powerful when they are combined with a good trading strategy. We as humans are naturally emotional and at times, we can get greedy. To overcome this temptation, we need to have a clear plan of action to counteract them, thanks for reading.

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In this article, we will be going through the phycological factors that might be causing erosion to your trading balance


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