What Are the Basics Of Trading Psychology?
Controlling your emotions is a big part of forex trading success. Learn the techniques to stay on top of the game and not lose your cool when the trade surprises you with a wrong turn.
The field of active trading is a challenging, fast-paced environment with nearly infinite possibilities and pitfalls. The odds are seemingly stacked against active traders in the marketplace, with studies suggesting that upwards of 80% consistently lose money and only 1% achieve predictable, long-term profitability.
With four out of five traders showing regular losses, it's a wonder anyone is willing to pursue a career in the trading industry. After all, it's not typical for an individual to invest time and money into a business that has an 80% chance of failing. So, why the attraction to active trading as a profession?
The answer lies in the benefits that success in the marketplace can provide to prosperous traders. Financial independence, self-empowerment and an escape from an unsatisfying career are a few perks enjoyed by those who beat the odds and grasp the brass ring.
Avoiding trading mistakes
While all traders make mistakes regardless of experience, understanding the logic behind these mistakes may limit the snowball effect of trading impediments. Some of the common trading mistakes include: trading on numerous markets, inconsistent trading sizes and overleveraging.
Greed is one of the most common emotions among traders and therefore, deserves special attention. When greed overpowers logic, traders tend to double down on losing trades or use excessive leverage in order recover previous losses. While it is easier said than done, it is crucial for traders to understand how to control greed when trading.
Importance of consistent trading
New trades often tend to look for opportunities wherever they may appear and get lured into trading many different markets, with little or no regard for the inherent differences in these markets. Without a well thought out strategy that focuses on a handful of markets, traders can expect to see inconsistent results. Learn how to trade consistently.
Below are 5 top Forex risk management tips that can help you reduce your risk in trading. These tips can be useful at all levels of trading, from beginner to professional, and in all areas of Forex trading psychology (and in the psychology of day trading, psychology of trading stocks, etc.):
While feeling euphoric is usually a good thing, it can actually do a lot of damage to a trader’s account after he or she hits a big winner or a large string of winners. Traders can become overly-confident after winning a few trades in the market, for this reason most traders experience their biggest losing period’s right after they hit a bunch of winners in the market. It is extremely tempting to jump right back in the market after a “perfect” trade setup or after you hit 5 winning trades in a row…there’s a fine line between keeping your feet grounded in reality and thinking that everything you do in the markets will turn to gold.
- Educate yourself on trading and Forex risk
- Use stop losses
- Use take profits to secure profits
- Don't risk more than you can afford to lose
- Limit use of leverage
How can trading emotions and psychology put your Forex positions in danger?
What is trading psychology? Why is it important to keep in mind? As psychologists and behavioral scientists suggest, our actions are based on our emotions quite substantially, therefore, we're bound to make mistakes when we are in an unhealthy mental state. And all this can manifest itself in a poor Forex psychology.
For example, when you experience a loss in your trading position, it's very easy to get angry and lose the ability to make clear decisions. And with such psychology of trading Forex, you can make rash decisions, go after the price movements that aren't beneficial for you, and ultimately, get into more losses.