Trading psychology is one of the most significant factors that underlie success or failure in trading. Experienced stock traders say that hard skills and knowledge make only 20% of your results. The remaining 80% is accounted for by psychology: conscious and subconscious mind, stress tolerance, and emotional intelligence.
When it comes to real trading, fear is the very first emotion that the newbies face (although experienced traders are no exception).
Today, we’re going to delve into some practices to conquer your fear and make it work for you.
As far as Forex goes, trading psychology is reflected in behavior that depends on how you can work through your own fear. Here’s the most important thing to understand: you don’t have to fight your fear.
First, it’s a basic emotion and self-preservation instinct that is intended to protect us.
Second, for every action there is an equal and opposite reaction. The more you fight against fear, the more fear you feel.
It’ll end in a deadlock when a trader sees a promising trade but can’t make any good use of it.
Instead, you have to make fear work for you. There are two ways to achieve that. Let’s call the first one “the way of the samurai”.
They say that to win a decisive battle, you must fight as if you’re already dead. In real life, it works like this: imagine that something that you’re afraid of has happened to you. Face these emotions and think of what you’ll be doing over the next few hours. Play it in your head, take it all in, and your fear will recede. Then go back to reality and do what you have to.
How to use this technique in trading? Be clear about what you are really scared of. The psychology of successful trading requires you to be honest with yourself. We’re all afraid of losing money. If you trade using credit money secured against your apartment where you live with a family of five, having three young children, losing your deposit will definitely cause severe problems. Your fear is understandable and reasonable.
This is why you should never trade money you can’t afford to lose. If you allocate spare money in order to trade, what would happen to you if you fail? Maybe your shopping dreams that you’ve already had will collapse. It’s frustrating. However, there won’t be any dramatic changes in your life. Then go through your loss mentally, realize that the worst-case scenario won’t have a huge impact on you, and get back to trading. Your fear will recede.
Trading psychology is always about coping with fear. In addition to the above “way of the samurai,” we’d like to tell you about another way to harness your fear. You need to take it from the subconscious to the conscious and try to overcome your weaknesses in trading.
To recap, fear arises from the impulse of self-preservation. If you’re new to trading, you don’t know how to manage money, you don’t have a risk and money management strategies, your fear is your friend. It’s like a red light pointing at risks. Of course, it can be ignored but your trading results will depend on whether you’re lucky or unlucky (more often unlucky).
However, you begin to transfer your fear to where your tasks can be solved by using a constructive approach to fear and asking yourself the following question, “What am I afraid of and how can I protect myself from this?”
Afraid of losing money? Learn how to avoid losses. To that end, you need to have a profitable trading strategy, a clear money and risk management system and, preferably, Risk Manager brought to you by Gerchik & Co. Instead of being shackled by fear, you can find and develop a strategy with positive expected values, calculate and put down your money management system, enter its parameters into Risk Manager, and calculate what you spend in each deal.
All in all, your fear makes you a successful trader and a pro money manager. There is nothing to be afraid of, as you calculate and secure each step. This is the right Forex trading psychology.
We’ve learned two techniques, so let’s take a closer look at how to turn popular trading fears into your allies.
You may be afraid of losing money. These are the steps you should take:
1. Trade using the money you won’t be afraid to lose.
2. Don’t make this money a part of your plans. This means that you shouldn’t expect to double your deposit quickly, withdraw funds, and buy a car. In case of your first deposit, you need to use a different approach. Imagine that you’ve spent it, let’s say, on education. Record it as an expense, and then trade using this money. In this case, you won’t get emotional about this account, and will be able to trade without turning a hair.
3. Trade according to a trading strategy that you’ve previously tested out in your demo account. It must be profitable.
4. Comply with your risk and money management strategies.
It’s still your fear of losing money. If you’ve followed all of the above recommendations and are trading using money taken from your financial plans, it’ll be easy to deal with this fear.
1. Open your trade when you receive a trading signal given by your trading strategy.
2. Your deal must include a stop-loss order according to the market situation.
3. Your risk position shouldn’t exceed 1% of your deposit.
4. In this case, your bone-chilling fear of opening the first trade turns into the question of whether you’re afraid of losing 1% of your deposit if you fail. Most likely, you’re not.
Trading psychology and related books often raise the question of how to keep trading after a failure. It’s definitely hard because of overwhelming emotions. This is why it is important to get properly prepped.
1. Analyze your previous deal: why did you get a stop-loss order? If this is your fault, you need to identify your mistake and fix it. Write your findings in the trader’s diary.
2. It so happens that you do the right thing but still get a stop-loss order. Anything can happen in the market. And if you stick to a profitable trading strategy, your income from the next trades will cover your losses.
3. Install Risk Manager in your account and set the maximum number of losing trades per day, week, etc. It helps you stop in time and protects you from emotional losses.
Have you ever closed a trading position before getting a stop-loss or take-profit order? If you have, then you’ve probably been driven by your fear of losing money. However, if you think that “a bird in the hand is worth your benefit from a take-profit order,” this works against you. If you trade using a profitable strategy, then losing deals will be outweighed by the income from successful trades. If you close any lower profit, you can disrupt the statistics and get completely different results for the month and quarter.
How to cope with this fear and defeat the habit of closing deals too early?
1. The psychology of successful trading assumes that trading is what you do before you open a position. Open deals only according to your strategy and strictly follow your money management rules. Then let the market and time do the job.
2. If you don’t use a scalping strategy that requires you to sit at the computer constantly, you can close your terminal and do other things after setting current positions with signals.
3. Realize that closing deals too early won’t protect you from losses, as it only helps them grow even if you have an excellent trading strategy.