Why is Trading Psychology so Important

By Louis H-P on February 6, 2019

Speak to any aspiring retail Forex trader about what they need to succeed, and trading psychology rarely comes up. Most aspiring Forex traders will focus on finding a good broker, learning what drives currencies and finding some good analytical software. Yet before you use any of these, have you considered your emotional side? As the person in control, it is your decision-making process which will influence your Forex trading success.

Challenging yourself

When you are trading Forex, you are trying to see clearly in the confused world of currency trading. How do you know which currency pairs are going to move the way you think? Humans are creatures of habits, they do not handle change easily. If you are used to trading in a particular manner but the market evolves and goes against you – do you have the trading psychology to handle this? As humans we tend to approach things with our own solution.  It is easy to latch on to something because we are sure we are right. Trading psychology may require us to challenge our approach so as to ensure we can succeed in becoming a successful Forex trader.

Why is it important?

Forex trading is stressful. Stress and pressure lead to mistakes. Mistakes lead to losses and potentially you losing all your money. Retail Forex traders who are starting out need to be ready to have some losing trades as they learn what is required. It does not happen overnight. This is where trading psychology comes in. If you can manage your emotions better than the next man, you will not make the basic mistakes which kill off aspiring Forex traders. You will learn to deal with disappointment and grow into a consistently profitable trader which is the ultimate aim.

Psychology in Forex trading

Psychology is a science which tries to explain how the mind behaves and how it reacts to conscious and unconscious thought. Within trading psychology there are several cognitive bias that every Forex trader should be aware of. The main ones are:

• Confirmation bias: You place importance on information that backs up your theory and discredit information that does not agree with the trade opportunity you think you have identified.
• Self-serving bias: You place more importance than is the truth on your successes, ignoring other factors which may have (accidentally) led to your success.
• Framing: You close your mind to other approaches and only see things with a narrow minded view.

Use Trading Psychology to your advantage

Humans are not robots. We naturally have emotions. Any aspiring Forex trader should not try and change who they are, but learn to compartmentise their emotions. When you enter the retail Forex trading arena, the row you had with your partner, that your football team lost badly at the week-end or the joy of a promotion at work should be left firmly on the side. You should approach Forex trading with a cold calculated focus. It helps to have a structure and process to assist you.

Maybe find a particular time of the day or working in a particular location where you can block everything out. In trading hours Forex we suggest that their ideal times to be Forex trading. Another way of taking the emotion out is to have a trading plan. The guidelines will ensure that any spur of the moment decision fits in to your Forex trading strategy.

Do you know yourself?

If I asked you what was your favourite colour? Or your favourite drink? You would probably have a very quick answer to give me. Do you know your your emotional make up? Can you handle adversity? Forex trading involves losing trades. It hurts emotionally. Financially it is painful. Are you able to analyse without emotion why this happened? Seeing a bad trade as an opportunity to learn and improve from is key.

There is a balance between negativity and positivity. You do not want to get into a depression because a trade has been unsuccessful, equally you do want to get on a massive high because you have had a winning trade. Controlling your emotions and following the rules of a Forex trading plan is important.

Conclusion

Trading psychology is not something we are born with. It is something to be developed. The more you practice, the luckier you are going to get. Do not let your emotions drag you into over-trading as tempting as it feels. Trading psychology should also prepare you to be successful and being prepared for things not to work out. Do not forget that it is real money you are trading. Trading psychology is about getting yourself in the right place emotionally to get you to trade successfully!

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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