If ever scientists invent pills against greed, those will most definitely become a must have for all Forex traders. Greed is one of the overwhelming reasons based on forex trading psychology that lead to losses. And if you couple that with some typical anxiety, such as fear of “entering the market”, closing a trade too early, or too late, losing your chance after a market spike, forgetting to trail your stops… There you go – we have us a typical real-money trader, and almost a recipe for disaster.
Here’s one of the most common way for events to unfold in such a case. A beginner trader is trading on a demo account, gathering experience and learning the ropes. Usually, everything begins wonderfully well. He analyses the market layout regularly and understands it pretty accurately, although he never really insures himself against the unexpected fundamental market turns. As a result, his demo deposit is growing steadily, and after several months comes the time of his first live account. And here is where everything changes: with live funds at stake, the trader becomes afraid to make one fatal error, fear of underperforming, etc. On the other hand, if he succeeds with live money at least for a couple times, excessive confidence and greed manifest themselves, and he begins to trade with unnecessary risk and carelessness. So why does this happen? Why does a prepared trader become irrational and unsuccessful? How and why should we suppress this fear and greed?
The reply to this question is long since known to the trading community – it’s all about forex trading psychology. There are numerous books and articles out there, covering this topic in depth and in all aspects – take the time to google them up on the Internet. There’s also a wide choice of different methods and courses regarding trading discipline and fighting trader’s fears. You can even choose a trading strategy that is most suitable for your psychological qualities – this is a very powerful way to negate some of the common trading errors. Keep in mind though, that however much you change your trading style, in the end it all comes down to your emotional state while trading – forex trading psychology is the key here.
Such psychological traps are a common downfall for almost any beginning trader, however, there are some tricks that can help you negate their effect.
First off, never trade with money that you have lent, either from a friend or a bank. For what it’s worth, never trade with anything that you cannot afford to lose – otherwise the cost of a single error would be far too high for you. This feeling nagging at the back of your head is always in the way of correct decisions. Begin your Forex experience with deposits that wouldn’t be a big financial or emotional blow to you.
Don’t hurry to jump into trades as soon as you have opened your account. Wait for your signals, remember about technical and fundamental analysis, pay attention to the economic calendar. Make sure to have factual reasons rather than just your intuition when opening a new trade.
Always use Stop Loss and Take Profit levels. The most common ratio for that is 1:2. It is hardly a good decision if your account doesn’t have sufficient equity to support a trade with that ratio. And never think that Stop Losses aren’t manly – a slightly lower profit is always better than losing your deposit whole.
Never expand losing trades. However much you believe in a turn in the market direction being just behind the corner, just don’t. Otherwise, you would be stuck with the temptation to continue increasing your lot, and even bigger potential losses on the line.
Always analyze your trading performance and take note of what you find. Such “trading diaries” will help you figure out what are your most typical downfalls, and correct your trading style accordingly. One day you will create a system that works for you almost ideally, and I hope those hints help to improve your trading and take on forex trading psychology!