Trading in the financial market is a technical activity. Therefore, before entering the market traders should have a good understanding of the market structure. Besides, the technical reason traders should have enough knowledge of other factors that move the market.
It is quite impossible to become a successful trader without having a good knowledge of technical analysis. Additionally, there are some other factors like fundamental analysis, sentimental analysis as well as geopolitical news are also important to know.
If you think of yourself as a good trader after having enough knowledge about technical and fundamental analysis, you are wrong. Having knowledge about the market or about trading is the primary stage to be a successful trader.
If you don’t know how to react to uncertain situations or how to calm down while making a good profit you probably going to lose all of your investment.
Trading psychology is the right mindset and the ability to think without any bias. Trader should remain disciplined and exercise control over their emotion even when the market is not doing what they expected.
Common Mistakes of a Trader
Before moving further about the importance of trading psychology, we will see some common mistakes that traders do usually by not having a good mindset-
Trading without Stop Losses
The main reason behind trading without a stop loss is that traders don’t want to lose money. Some traders afraid of failure and that puts their ego at stake while some traders become overconfident about their strategy and wait for the price to react exactly the same as they expected.
Early Close of Trades
Traders close their trade early as they need to see instant gratification. The trader becomes anxious and fearful about reversing their position, so he decides to close the trade to relieve the anxiety.
Hold the Losing trade
When trade runs with loss traders don’t like to admit that their trade was wrong. Therefore, they hold positions, hoping that the trade will come back. However, at the end of the day, they add more positions to the current position. At last, they ended up losing all the money.
Wishing and hoping
Some traders execute trades based on their hopes and wishes, rather than following their analysis and money management
Taking the Trade, not As a Business
This happens when traders get addicted to trading, It is quite similar fashion to how gamblers get addicted to gambling.
Feeling invincible
After a series of winning trades, traders might feel like they are master of it and can control the market. Therefore, they start to take risky positions and ended up with a loss.
Trading with a bigger lot size
After some winning trades, they start to think of the Forex market as a money-making scheme. Therefore, they start taking trades with bigger lots. After having some losing positions they took another risk to mitigate the previous one.
Overtrading
This is caused by greed and anger. After making some losses traders try to recover them as soon as possible, therefore, they take more positions in other currency pairs to recover the loss instantly.
Why Traders Lose Money?
It is a common question we receive from traders, especially new traders.
There are some common psychological facts that most traders don’t want to consider. As a result, they find themselves as a loser.
Let’s find the reason behind losing money in the Forex market due to not having a good trading psychology
Fear
It is a natural human reaction to anything they perceive as a threat. However, in the case of trading, the threat is the possibility of losing money. Therefore, traders feel more fear of the possibility of a bigger loss.
There are several ways to get involved in fear while trading.
The most common reason for fear is being afraid to get involved in a trade. If a trader feels fear of losing money before taking entries, they may miss some profitable positions. Being cautious is important in trading but being overly cautious may lead to missing all entries. If you do not take any trade you cannot make any money.
The fear may be after entering positions. When some breaking news and the news data show negative results traders might panic. Therefore, they close their positions in loss without sticking to their strategy. Additionally, some trader tries to catch the spike without stop-loss in fear of sitting stop losses and expect the price to go towards their desired direction.
However, a fear-driven exit may help you to avoid certain loss, it also prevents you from making gains once the market rebounds from the volatility.
In addition to that, some traders exit positions early as they are afraid to hold positions for more than a day.
Greed
It is the opposite of fear.
Fears keep you away from trading by an early exit or not taking a trade at all whereas, greed pushes you to take risky trades and hold losing positions for a longer period than originally planned.
Greed is often caused by the fear of missing trades. When traders miss any good trading opportunity, they want to retake the entry when the price already moved.
Some traders don’t want to close their trades when the price reaches the targeted level. They discard their strategy and wait for more moves with the hope of more profits. Unfortunately, when the market reverses, all gain wiped out in a matter of seconds.
The best way to get rid of greed is to use a fixed trading strategy with strong money management.
Anger
This emotion comes when you are unable to control the other two emotions. As a result, when your trades go against your expectations, you started to feel frustrated.
If you enter the market with wrong setups due to fear and greed you may lose on the particular trade. Therefore, after making the loss you may try to recover it with frustration. If the market condition does not go in your favor you may lose all of your my with that emotional decision.
In the Forex market, anger is usually targeted at the market. Angry traders often find themselves engaging in revenge trading. Therefore, they often take trades in uncertain condition and that bring huge loss.
To get rid of the anger, traders need a lot of training to improve their mentality.
How to Improve the Trading Psychology
Successful traders know how to react when the market turned against them. Therefore, they can set their plan in accordance with the market condition.
Have a Plan
In order to make money from Forex trading, you should treat it as a business. As no business can run successfully without a plan, you should make an appropriate plan before entering the trade.
After taking a trade three things are gonna happen. You may lose by hitting your stop loss, it may hit take profit or the price may go nowhere.
You would make a plan for what you will do if the market reacts negatively or positively. The next challenge is to keep yourself stuck to the plan.
The best way to achieve this is by making enough practice. Good trade management skills do not come in a day. You should set your subconscious mind that your trading strategy is well and its gonna give you a positive return.
Therefore, before getting into the trade, determine your entry-level, risk-reward tolerance, and determine how you will exit the trade.
Prepare to Lose Money
There is no holy grail in the Forex market that can guarantee you a 100% profit. Big traders like Warren buffet also make a loss and their amount of loss is much bigger compared to the retail investors. The main difference between them and looser traders is the ability to take the loss.
Successful traders, know that making a loss is a part of the business. Therefore, they take the loss easily and change their plan to make another successful trade.
Another thing is that successful traders have good knowledge about the market. Therefore, they know the story behind the hitting stop losses and they react accordingly.
So to be a successful trader, prepare to lose money and learn from the loss.
Practice Continuously
There is a popular saying that practice makes a man perfect.
No matter how much research about the market, you cannot get enough knowledge until you go into it.
Practicing allows you to try what you have learned. After learning a trading strategy, you should make enough practice in the demo account or in a real account with small deposits. Therefore, you would be able to understand how the market moves and how you should react to its move.
Conclusion
After the above discussion, we can come to the conclusion that the major difference between successful and unsuccessful traders is having strong trading psychology.
Regardless of how much you perform market analysis, not having control over emotions can easily lead you to abandon your trading plan.
This is why developing the right trading psychology is very important to being a trader. Always make sure to calculate the risk to mitigate losses.
