Trading successfully in the financial markets requires a specific skill set such as determining the direction of the market trends. But, all of these skills could be useless if a trader doesn’t have a particular mindset. Therefore, before knowing how does forex trading work, it is crucial to learn about trading psychology.
Trading psychology plays a very important role in trading forex, stocks or any other financial market. It is associated with the mindset of a trader. Trading psychology includes how the trader is managing his emotions, taking decisions and the thought process.
Forex trading often requires thinking fast and making quick decisions on a short notice. To achieve this, a forex trader needs a specific presence of mind. The trader also needs the discipline to be consistent with his own trading plans and be aware of when to book profits and losses.
Getting emotions in the way causes a trader to make bad choices and decisions. Overwhelming by emotions is a major reason due to which many forex traders fail.
Although it’s true that psychological stimuli are subjective and vary for individual traders, there are still certain universal factors that determine how traders conduct their trades. These psychological stimuli include: fear, greed, anger and impatience.
When a forex trader gets bad news about a particular currency that he bought, or about the market in general, he naturally gets scared. Many traders, in such a situation, overreact and want to liquidate their holdings, while stepping back from taking anymore risks. If you do this, you may avoid some losses but may also miss out on certain profits.
As a forex trader, you need to understand what fear is. This is a natural reaction to a recognized threat or danger. In case of forex trading, fear is a threat to your profit Potential.
Understanding greed and impatience
When a trader is overwhelmed by greed and impatience, he usually wants to get profit immediately and at large amounts. He does not want to wait and make small steps towards success, he wants to get all at once. This mindset can often lead to the failure of many traders.
Greed is very difficult to overcome. It is often based on the instinct to get just a little more. As a forex trader, you should learn to recognize this instinct and need to design A trading plan based on rational thinking.
When a trader loses during the trade or when the market doesn’t go in favor of the trader, anger tends to get hold.
Anger is an innate feeling that every single person experiences in their lives. That’s why it is not possible to completely suppress his feeling; however with some practice and mental work you can learn how to react better to anger.
If you want to overcome anger and fear, and manage greed and impatience, you need to practice your psychological responses to different, just like you practice your actual trading skills. In this way, you will not be overwhelmed when the market behaves against your favor.