In order to be an effective day trader you must learn to master your Forex market psychology. Not having a grip on your psychological trading downfalls can cost you a lot of money and undue stress.
Understanding Forex market psychology often means understanding the mass psychology of the Forex market. For the purpose of this article we will stick with the topic of individual market psychology, or how personal psychological hangups can cost you money in the Forex market (or any market for that matter).
Understanding Forex Market Psychology
One way that traders (especially new traders) are hindered psychologically is by fear of trading. This happens often, and can be hard to overcome for some traders. Most often this is due to a lack of confidence in one’s trading system, but fear of trading can also affect seasoned professionals from time to time.
Cure: Find a trading system that you have confidence in, and then learn to have the discipline to stick to your trading plan 100% of the time. Keep track of your trades:
- To prove to yourself that your trading system works in the long term
- To teach yourself your own personal bad trading habits
- To visualize where you have made and where you need to make improvements
Another way Forex market psychology gets to traders is through revenge trading. Revenge trading basically happens when you lose a trade, and you enter another trade almost immediately in an effort to gain your losses back. This trade is brought on by emotion, has little analysis to back it, and is rarely profitable.
Again, this is considered a rookie mistake. Taking a revenge trade shows a complete lack of discipline, however, even experience traders have the urge to do this from time to time. Revenge trading is a good way to blow your trading account.
Cure: When you lose a trade, take a minute or two to collect yourself. Go watch tv, a movie, check your social media sites, go for a walk, etc…. Do anything you can think of to get your mind off of the market for a bit.
If you are a particularly emotional trader, you may opt to stop trading for the day after a loss. Many professional day traders stop trading for the day after a loss or two.
In order to be a successful day trader, you have to learn to let your winning trades ride. This is another area where a trader’s psychology can fail him in the Forex market. It is sometimes hard to let winning trades ride, because of the fear of turning a win into a loss.
A rookie trader will take any profit saying, “I’ll never go broke taking a profit.” The fact is that if you are too quick to take your profits, you could end up losing money in the long run.
Experienced traders know the value of letting winning trades continue to surge. Sometimes the difference between daily and monthly profits or losses comes down to a breakout trade or two. This is often more of a challenge for rookie traders to understand, partly due to the fact that few rookies keep a trading journal.
Cure: Again, part of the issue with letting winning trades ride is confidence. Find a trading system that you are confident in. Make sure your trading system has distinct entry and exit point strategies (like the Top Dog Trading system) to help alleviate most of the guesswork.
I hope this article gives you a better understanding of Forex market psychology and some of the ways it can affect your trading. Understanding how to correct your own personal psychological mistakes is all part of the process of becoming a consistently profitable trader.