This guide to forex trading psychology will help you beat your emotions so that you can become the peak performance trader you are meant to be and help you beat your emotions in forex trading. You will be learning a variety of lessons throughout your trading journey, including this one, which is perhaps one of the most important lessons you will learn. If you do not master this strategy, you will be unable to beat your emotions. This can be extremely detrimental to your trading, especially if they take over while you are trading.
It goes without saying that no matter how good your forex trading strategies and systems are, if you cannot control your mind, then it is all for nought. Here are a couple of key points that you need to know about the psychology of trading before you begin your trading journey if you wish to succeed.
The revenge trading process involves the act of trying to recoup your losses after a trade has turned wrong. As a trader, I have seen hundreds of people embark on a successful streak that has brought their account up to +50% over a shorter period of time, only to lose it all in one day because they engaged in revenge trading.
You must view losing trades as part of a probability game since they happen to everyone. We'll assume your own trading strategy is about 80% accurate. It is reasonable to expect 20 to 30 losing trades for every 100 trades. Having said that, this is simply the nature of how trading works and there is no way you can expect to win every single trade you make. If you lose a trade, do not panic, there is nothing wrong with your settings or the universe, it is just a part of the trading process.
In order to be successful, we need to utilize the law of large numbers in our favour, and to accomplish that, we must trade a large number of trades over a long period of time. It is impossible to achieve this if we keep chasing our losses. Taking this into consideration brings us to our next point.
You should never chase your losses. The importance of this is emphasized because chasing your losses and revenge trading are two of the fastest ways for you to blow up your whole account.
Essentially, the reason why chasing losses can be so dangerous is that it opens you up to a huge number of revenge trades that can compound your losses at the same time as you attempt to compensate for them. The more losses that you commit to a trade, the harder it becomes for you to accept that the trade is a losing trade and that you should just walk away from it as soon as possible. It would be a good idea to have a very clearly stated reminder to tell you not to chase losses after you have been stopped out.
One of the most helpful rules to live by is this one and it can help you maintain your ability to trade profitably over the years if you follow it consistently.
In essence, the idea is that, if you make three losing trades in a row on any given day, then you should close your MT4 platform, turn off your computer, and go on a walk. Whether your mind is not in the game, or the market is just disagreeing with you, or you're not in sync with the market - there can be a hundred and one reasons but all you have to remember is that when you're on a run of 3 losses, you're more likely to continue on that run of losses.
In addition, this is a good practice since your subconscious mind would have calculated how much you had lost for the day and searched for ways to "make it up". As you can tell, this is a potentially very dangerous situation as it is the first tiny opening that could lead you to a day of revenge trading and ultimately, a regretful experience.
It is common for us to stare at charts too long waiting for the correct entry. As a result, we sometimes compromise our entries due to impatience, or we may try to use other indicators (which we have never used before) to justify an earlier entry that we could have made. Any habit that causes us to compromise our entries is extremely dangerous.
Finding something to do while you await your optimal setup is the key. There are people who iron, read books or do their daily work, and there are people who simply watch YouTube videos. Meanwhile, they set a price alert for their mobile phones so that they know when to return to their charts. It's either that or they leave a pending order with their stop loss and take profit in place.
Suggested read: How does leverage work in forex trading
No matter how good your forex trading strategies and systems are, if you cannot control your mind, they are worthless. In this second part of our series on the psychology of trading, we outline some other key points that you need to be aware of before you embark on your trading journey.
Because of the freedom and nature of trading, we may be tempted not to adhere to rules. This is one of the most devastating trading mistakes a trader can make. Oftentimes, we are tempted to enter into trades that barely meet our requirements, and as a result, we end up losing more than we gain.
We often come up with several reasons to justify taking a position because it is "now or never". The same applies to closing out our trade early in case the market turns against us. I'm sure many people can relate to closing out a trade early based on their gut instinct or intuition, only to see the trade move very well in their favour, leaving them gutted.
We establish many rules here to ensure optimum performance. Avoid good entry points when the spreads are too wide and stay patient while waiting for a good entry point during big news events (the market tends to whip you out and is unpredictable at those times).
No matter what investment plan you read, you should not aim for a daily target of pip growth or account growth.
Ideally, you should aim for a maximum number of pips per day (e.g., 20 pips a day), but not a fixed number that you will not stop trading until you reach. What is the reason for this? Whenever we are constantly striving to achieve a goal, our brains will come up with creative ways to achieve it.
If you have not hit your 20 pip target by 10 pm, your brain will try to come up with different strategies, entries, and ideas to convince you to compromise on your entries to get into a trade - this will result in you getting into non-optimal setups and incurring a high risk of losing. Therefore, you should accept what the market offers you. It is not a good idea to attempt to force something when nothing is there.
There is no hard and fast rule when it comes to taking a break and calling it a day after hitting a certain number of pips (for example 20 pips). Research has shown that traders are generally complacent and have a "God complex" where they think everything they touch will turn into gold - and what happens is that they often return everything to the market after hitting this number of pips. Set a maximum target, but do not set a minimum target.
Further Reading: Risk Management in Forex trading
As soon as we enter a trade, we have the tendency to watch it unfold pip by pip, and that is fine, in a way. Suddenly, you feel the urge to adjust the TP or SL. Wouldn't it be better to give my trade a little more breathing room by raising the stop loss? Since the market looks like it is moving against me, how about I close all my long trades and lock in the 5 pips of profit I currently have?
At the end of the day, even a few small tendencies can have a significant impact on your overall profits if you pay attention to them. Therefore, you may want to consider using a trade manager system or an EA to help you with the management of your trades. By using it, you will be able to automatically adjust your take profit, stop loss, break even, scale-out of profitable positions, trigger trailing stops, and ultimately, maximize your trading performance and your return on investment. As a result, trading would become less disruptive due to the absence of disruptive emotions.
They all help you overcome your emotions when they try to take over and undermine your trading performance.
The process itself is of the utmost importance, not the final result. This is what we should focus on.
The process of entering, managing, and exiting a trade should be at the centre of every trade we do. We would paint a terribly negative picture if we focused solely on results.
To achieve our goal, we must comply with our process rules exactly as they are stated.
Since you have a proven trading strategy and are executing it flawlessly, you are well on your way to becoming a successful forex trader. In the event that you performed all of the steps above and still lost the trade, it is normal. It is impossible to achieve 100% accuracy without incurring any losses.
In the instance of not following your trading plan at all, your trade may have made a profit, but that is luck and poor trading technique on your part. While it might work once, it is unlikely to work in the long term. It goes without saying that you are here to make predictable profits based on predictable trading, and to do that, you must follow predictable rules.
Suggested read: Forex trading basics
Mastering the psychology of trading begins with knowing these key points. It is important to remember that every part of our body is designed to be inefficient at trading, so read all these lessons again, re-read them and internalize them as you continue to gain knowledge and experience about trading in the forex market.