Trades are won and lost in our heads, not on our laptops. The psychology of the market, individual psychology and mental discipline are paramount. It is about developing the trader mindset, and then applying that to an excellent methodology. Learning to trade Forex is a new life skill. We have to change our psychological makeup in order to succeed in Forex trading.
This may surprise readers but after six years full time trading, I truly believe Forex trading to be 75% psychology and just 25% methodology. This means trading is really about who we are. If you seriously want to know who you are, warts and all, then trading will help you find out. We are all very much products of who we are and where we came from. To survive in the Forex market we have to overcome any obstacles of birth, childhood or background. An example would be at an early age our parents may have said to us, “Keep away from financial markets you will lose your money.”
Over the years this will have embedded itself into our subconscious ready to re-emerge when we trade. A favourite saying of my parents was “money is the root of all evil,” which made me believe for a long time that making money was bad and this kind of deep subconscious belief can sabotage your trading. We all have these limiting beliefs and sooner or later we have to confront them.
For most of us, our lives have structure and as human beings we like order and predictability. We are creatures of habit and in general we follow the “herd” mentality. To become successful traders we need to learn a new thinking methodology (the herd is often wrong). We must quickly understand that the Forex market is in constant change, a never-ending event and is an emotional environment of stress. It will be the most difficult undertaking mentally most of us may ever take. The Forex market is ruled by fear, greed, anger, revenge, overconfidence, ego and other emotions.
Let’s take a deeper look at fear and greed.
If you are in a position and the market is going up greed is telling you to buy more and fear is telling you to take profit. If you are in a losing position, the fear of being wrong makes you hold onto this losing position, and then greed may convince you to buy more to average in, so it will be easier for you to come back to break even.
If you are not in a position, and the market is going up fear is telling you that you’re missing out, but it’s your greed that causes you to get in just after the greatest increase, just when it is about to reverse its direction.
It is often impossible not to listen, when both of these emotions whisper into our ears at the same time.
If you want to become one of the few Forex market winners, you must have a Trading Plan. This plan will have rules for entering the trade and exiting the trade. You will know your risk on the trade before you enter.
The fear of pulling the trigger, the fear of losing money and the fear of being wrong are the primary fears. The fear of losing a winning position (which makes us get out of a trade too early) is another one. You are destined to meet these fears during your trading career and indeed some of you will have already had the “pleasure.” I want to prepare you to deal with the fear and master it.
Fear motivates retreat.
The key to handling fear is having a trading plan and a set of trading rules. Before you put on the trade you will know where you intend to exit. This will be as a take profit target if the trade is successful and as a stop loss if the trade goes against you. There is no worry in this situation because the parameters are set, you step away and let the trade play out. Each time the setup occurs you take it without question. However, this is not as easy as it sounds. You must trust yourself to follow the setup rules to the letter. You must trust yourself to wait for the setups to occur before acting. This takes much practice. If you continue to break your trading rules you lose trust in yourself and this is not so easily repaired.
The market will do what the market will do regardless of whether or not you sit there, scared.
Greed makes us try to make money too quickly. The “get rich quick” brigade, with unrealistic expectations of becoming a millionaire overnight suffers from this. The more you focus on the money, the more it evades you. Focus on the trade setup and the money will follow.
Greed makes us “overtrade” and that is the surest way to the poorhouse. Overtrading is when we take trades that are not quite within our rules but we take the chance anyway and hope for the best. We take too many trades, some of which are done merely on impulse. Impulse trading is done by traders without a plan and believe it or not this comprises the majority of traders. When you take an impulse trade there is no plan, which means no idea of when to get out of the trade. Traders who feel they can rely on their “judgement” whilst in a trade and be objective when in a trade are destined to lose their whole account. The more money there is at stake on this impulse trade, the worse their judgement becomes.
Greed makes us go for the “home run,” the “big kill” with the resulting pain.
Greed motivates attack.
Protecting your equity has to be rule number one. Without your equity you can’t trade and it’s game over. Make small consistent gains and your equity will grow. Combine this with compounding and your equity will really grow! We do this by setting profit targets and sticking to them. The best way to set a profit target is with a limit order so that the trading platform takes you out of the trade when the target is reached. It is important to also set daily targets in pips and to stop trading as soon as these targets are reached. Reach your daily target and quit trading.
These targets form part of your trading plan.
Both fear and greed are necessary to a small extent in order to trade but both must be kept in check.