Do you know that psychology plays a huge role in trading Forex? This begs the question, “What is the psychology of trading Forex?”
When you get into the habit of using the right psychology for trading Forex, it will give you a winning edge. And that is the secret that defines the difference between a successful trader and an unsuccessful one. Right?
Think Of This As A Race
Like in a race. The difference between a winner and a loser often is a fraction of a second!
The best way to learn about the role of psychology is to first study how the wrong psychology can work against you resulting in more losses than wins. Eventually, you will lose your account going down this path.
And then go on to show what is necessary to instill a winning psychology that can produce winning results where your account keeps growing.
I call this a secret because the winning psychology is oblivious to the vast majority of traders who lose more than they win.
Get A Head Start By Learning From My Mistakes
In this article, I will share with you how I used the wrong psychology when I first started trading Forex. And the struggle I went through to make a change in my mindset to use the right psychology.
Since we are all human, it is easy to slide back into bad habits. Our saving grace is to be aware when we do, and stop that slide early when it happens.
Only when we instill good trading habits, where good psychology reigns, can we expect to become successful Forex traders.
A Common Misconception About Trading
Many think that all it takes to become successful traders is to be well trained and to acquire and apply the knowledge and skills to make successful trades. This is what I thought when I began my journey into Forex trading.
Here’s the problem. We tend to be impatient and want results quickly. After I entered a trade and it started to go south, I didn’t want to admit I was wrong. Surely the trade would turn around. Worse yet, I increased my stop loss level. Eventually, the stop loss automatically closed me out at a big loss. This happened often.
This bad habit is a result of greed.
After such a loss, another bad habit takes over. Greed!
On the next trade, as soon as I saw it going south, I would close it to keep my loss small. Guess what usually happens after.
The trade turned around and went on to make a huge profit. What if …….. I stayed in the trade?
Summary Of Bad Psychology
Above I covered a few examples of bad psychology. These are the ones that worked against me. Every one of these was a struggle. My trading was very incionsistent. In fact, I almost lost all my money.
Once I realized what I was doing wrong, I changed my mindset and worked very hard to learn from my mistakes. Let me list the main five areas that worked against me below.
- Impatience To Trade
- Lack Of Discipline
- Bad Habits
I will be revisiting these bad habits with a twist further in this discussion Next I would like to review the methods I went through to learn how to trade.
Summary Of My Training
The training I went through was very extensive. It was methodical. The course taught me every aspect of Forex trading. I am not going into the details here except to discuss risk management in detail. And the psychology of using demo accounts when you start.
Basics Of Risk Management
The primary objective of risk management is to conserve one’s capital. Once this is lost, that will be the end of your trading. This is accomplished in several ways.
- Limit the maximum lot sizefor each trade relative to your dollar value of your accout.
- Use Stop Loss and Take Profit to control your trade
- Set the stop loss to mo more than 2% of your capital, preferably 1%, and never increase it
- Then set your take profit level at least twice your stop loss
- When you have multiple trades in progress, linit the cumulative loss to 5% max.
- Only enter trades your analysis shows you have a good probability of success
- When your trade goes into profit, gradually move the stop loss level to reduce potential loss
- Develop your own trading system that you can show in 100 trades you earn at at least 1%, preferably 5%
- When you notice your trade stalling before it reaches your Take Profit level, close it and take a profit
- Trade consistently according toi your rules, and don’t let your enotions prevent you from doing so
I will go into the details of the above points in the following posts. This is a good time to check out an introduction to Forex that I wrote in the foillowing link.
The Psychology Of Demo Accounts
When I started my journey in the world of Forex, I had to undergo extensive training using demo accounts. A demo account is what a Forex broker will provide you to practice trading before graduating to using cold, hard cash.
Right from the start, it is crucial to approach demo trading as if you were using real cash.
I successfully went through this process using accounts of various amounts. Starting with $10,000. Then moving to smaller accounts of $2,500 and $1,000.
There was a reason why the training program I went through used this approach.
A beginner will lose a lot of money. When you lose $1000 of a $10K account, the loss is only 10%. But in a $1K account, a similar dollar loss wipes you out totally. This is bad for one’s psychology.
Graduating Through The Demo Accounts
As you experience a string of successes at the $10,000 level, that is the time you need to start to decrease the amount of the demo account to prepare you to trade with a smaller account.
If you have $10,000 to open a trading account, then by all means do that. Be aware that this should be money that you can afford to lose. If it isn’t then do not open your first account with $10,000.
As you progress through each lower amount, the same rules should apply. Before you transition to using cash, make sure you have made at least 100 trades and made a profit at the end of that run.
Continue your training using smaller accounts until you arrive at the dollar amount you can afford to lose. Practice even more with this account. You should be confident you have a system where you can have consistent wins over losses. And that you can make a decent profit overall.
The Psychology Of Successful Trading
Here is the twist I was alluding to at the end of the Summary Of Bad Psychology above. I’d like to take each of the 5 characteristics of bad psychology above, and turn them into good.
The Psychology Of Good Trading is the exact opposite of the Psychology of bad trading. Let’s review how Good Psychology can work in your favor.
1 – Patience
As you navigate through the various styles and strategies of trading, you will find a few approaches that work best for your personality. And others that just don’t work for you. What doesn’t work for you may well work great for others.
This point emphasizes how the psychology of trading affects each trader differently. We are all unique individuals. Why shouldn’t we all have different trading styles?
You may wonder what this has to do with patience. Let me explain further.
The Forex market is not static. It is constantly changing. One moment the charts are rising, another they could be at inflection points. And in others, they may be going sideways, referred to as consolidation.
Different trading styles and strategies are necessary to be effective in different market situations.
Four basic chart patterns are used to trade. For simplicity, I am going to assume we are using the daily chart. When you find the market situation not compatible with your trading style, the best approach is to wait it out until it is.
What if it takes days for the market to change to match your style? Perhaps even weeks? This is where patience is required. If you lose patience and make trades in situations that are not conducive to your trading style, the chances are you will not have winning trades. Or very few.
The only way to overcome this limitation is to expand your knowledge and skils that you can apply to most market situations. Until then, just be patient and wait it out.
I will be going over these various market conditions in further articles. So stay tuned.
Does this make sense to you? I feel that the quality of patience is the most important psychological condition out of the five. Hence, I have devoted more space to addressing it.
2 – Greed
The bane of GREED raises its ugly head after you have a string of successes and become overconfident. It is easy to be overcome by a feeling of invincibility. This is when you are most vulnerable and are willing to take new risks.
Don’t do it. These moments of weaknesses can easily wipe out all your gains from your string of successes and then some.
3 – Fear
Fear often follows the devastating result of greed. The shock of experiencing a significant loss exposes our defense mechanism of fear. If not countered, we will make even more bad trades out of uncertainty. Our confidence gets shattered.
This is how I was taught to address the outcome of a bad trade. Stop. Don’t trade for a day or two. Conduct an audit of what you did wrong. Be honest with yourself.
Review your strategy and the rules you created to follow it. How and where did you violate those rules.
When you are ready to make your next trade look for a currency pair that will meet your trading criteria. Use the smallest lost size, i.e. 0.01. And select a 2% stop loss level with a 2:1 profit margin. Since you want to overcome your fear, give trade more room to move. Stick to just one trade and decisively make it.
Follow it to see if the chart movement meets your expectations. Regardless if your trade wins or loses, carry on to the next one. Until you start to experience a string of winning trades again. And you will
I learned how to read the charts to set up trades. And how to use indicators to confirm that my setups were sound. Of course, I had winning trades. But my losing trades were greater and my account dwindled. Fortunately, I was learning using a demo account. I will discuss the main steps you must take to develop the right mindset for success in this business you have the wrong psychology, you will guarantee failure.
4 – Discipline
When you execute trades because you are impatient, greedy, or fearful, these are all signs of lack of discipline. Train yourself to be disciplined and not do these things.
Success in any endeavor requires discipline. Discipline is the deliberate act of doing the right thing, even if forces are enticing you to do the opposite, which often is the easy way out.
Discipline is not always easy. But it is essential if you want to be successful.
Another characteristic of discipline is having the patience to grow your account before using higher lot sizes to place trades. It is like having the will for delayed gratification.
5 – Habits
Good habits are the opposite of bad habits as this section shows.
Bad habits have developed in our lives over some time. Don’t expect your good habits to replace your bad habits overnight.
It takes conscious effort and persistence to first recognize what good habits you need to have for successful trading and then work hard at adopting them.
You will need a large dose of discipline to replace your bad habits with good ones.
Click this link to learn more about HABITS!
Do you have what it takes to adopt a winning psychology? Can you be patient, avoid greed and fear, and be disciplined enough to adopt good habits for Forex trading?
Now that I have revealed to you what this involves using mistakes I made in learning to trade Forex, you have no excuses for failure.
I commend you for reading this post till the end. As a reward, I am offering you a free digital copy of the iconic book by Napoleon Hill called Think & Grow Rich.
Fill in the form below to get to the page where you can download the eBook.
I gave you good reasons why good trading habits based on a winning psychology when combined with the right knowledge and skills can almost guarantee your success. This book gives you exercises to build good habits in a methodical way that can change your life for the better.
Also, when I publish future articles on Forex I will have your name and email address to send you advance notifications. Rest assured, I never share this information with anyone else.
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I wish you much success in creating your online business.