Trading psychology is a powerful factor that an overall outcome of trading in the financial markets often depends on. It is said that its contribution to financial performance in exchange trading can reach up to 80%.
More often than not, psychological mistakes are the reason why the traders not only lose the profits but also the entire deposit. In today’s blog post, we are going to dissect the most common mistakes and ways to overcome them.
When it comes to trading and Forex trading psychology, there should be a certain discipline. And that’s where things may get tricky. How and what areas should a trader be disciplined in? Does it mean that you have to start trading every day at 8:00 AM without getting distracted by social media? Perhaps, this is not the only thing the trading discipline boils down to.
First and foremost, you should have a comprehensive approach. Your trades, entries, and exits from positions should be driven by the tried and tested rules of the trading plan. This means that you should have one and - most importantly - stick to it.
1. Get a ready-to-use trading strategy and work on it. All the rules must be clearly outlined and right in front of you when you are in the middle of trading.
2. Find out how to create your own trading strategy. Learn how to trade profitably. Perhaps, complete specially designed training courses to gain relevant skills.
3. Generate a trading plan using the Algorithm Developer. With this solution, you won’t miss a thing and will be able to create a clear step-by-step action plan to use when trading.
Aside from the clear entry and exit rules, the traders need to know what volume to open a position with. This is one of the main pillars of money management and a simple way to preserve the deposit.
If you make a spontaneous decision on the trading volume when placing the order, there is no way you can avoid losses. The thing is, any trading strategy, even the best one involves both winning and losing trades. And if you are being impulsive and use a big lot to enter a position with, and get kicked out of it by stop loss, losses will be pretty significant.
Would you like to have a predictable outcome? If your answer is “Yes”, you need solid money management. Calculate what lot size is needed to ensure that your risk does not exceed 1-2% in the deposit currency. Making calculations for each trade the old-fashioned way using a pen and paper is troublesome and time-consuming. But with Trader’s Calculator brought to you by Gerchik & Co, you can speed up this process dramatically.
As previously mentioned, it is important for traders to stick to the strategies when making deals. The market signal which is in line with your trading plan should be the only reason why you enter a position.
That said, more often than not the traders are itching to use another strategy, trade the news or rely on a signal provided by some new Holy Grail indicator. This is particularly common if the previous deal turned out to be successful, and out of sheer joy you rush to open a position in violation of your regular strategy just to make more profit. Needless to say, these are the trades that typically result in major losses.
The trading psychology often plays dirty tricks on traders, forcing them to open positions in an attempt to bounce back, or “catch up” after the perfect moment for entry is gone.
How to avoid this from happening? The first way is to figure out the reason behind this and work on addressing the causes by creating your own counter rules. Another way to tackle this issue is by installing the Risk Manager automated solution which won’t let you open positions when emotions take over.
A lot of people believe that the psychology of successful traders is what helps them avoid mistakes. But that’s not entirely true. Successful traders should not always be right. They just need to make money trading Forex. There’s a fine line between these two tasks but it is no less important. Whether or not you succeed in trading also depends on how well you understand this concept.
The traders may be wrong, their forecasts may turn out to be inaccurate, circumstances or market environment may change. The financial market owes us nothing, and it obviously won’t adapt to our predictions.
You have to respect the market, and understand that we are at the opposite ends of the spectrum. Your task is to adjust your actions and yourself to the market and its ever-changing environment as a sailor adapts the course of a ship to the weather conditions.
There is only one way to deal with this mistake and it is by understanding that you don’t have to be right. What’s important is to make profits in the long run.
Forex trading psychology is a huge topic, and it is impossible to cover every aspect of it in just one post. That being said, it is important to highlight another key mistake which lies in continuous punitive thoughts. After making a miscalculation or experiencing loss, some traders tend to blame themselves and think that they need to quickly bounce back or face the music. But since there is nobody to punish them, they are the ones who do all the punishing.
By seeing a psychologist or reading trading psychology books you can figure out what makes you react to mistakes a certain way and how you can deal with it.
The bottom line is, eventually you should understand that self-blame gets you nowhere. It takes away resources, focus, effort and time, and leads to more unprofitable trades. Instead of beating yourself up for failure, analyze it and what has led to it so that you can avoid making similar mistakes in the future.
The dialogue below illustrates this well.
Damn it, I’m such a clumsy idiot!
This is not what you should say in this type of situation.
Just say, “I’ve dropped the box of nails. Let me pick them up.”
Son: And that’s it?
Yes, that’s it.