Trading is a profession that demands extreme control over the mind. After all, precious money is involved, which could be lost in the blink of an eye. As much as trading depends on strategies, efficient and faster platforms and risk management; trading psychology is also an important aspect here.
Forex investors drive market activity; hence trading psychology also affects and is affected by the market. Every day, trader perceptions change, based on developments all around the world. Market sentiment is driven by such trader perceptions and emotions.
Common Emotions that Affect Trading Decisions
It is not that emotions are always harmful, but they should not get in the way of logical reasoning, or negatively impact one’s analytical skills. Markets see a range of emotions every day, such as:
- Fear: Bad news or repeated losses can instill fear in even the most experienced trader, which is normal. Traders who are new to the market also experience fear due to their lack of experience. Some traders place stop loss orders too close to the opening price, as a result of which one sells out their position too early. Fear could also keep traders in a position for longer than required. Although it sounds ridiculous, some traders have fears about making money too. Either they become wary about expanding out of their comfort zone or fear that their money could be taken away by taxes.
- Greed: Money and greed often go hand in hand. That is basic human nature. Investors often hang on to winning positions for a long time, which gets them blown out of a position. Greed also results in overtrading, sometimes beyond the maximum risk limits and time frames.
- Euphoria: A series of successful trades is good, but what happens when it leads to over confidence? A feeling that could cause a trader to believe that they can’t lose or that there are no errors in the methods they follow can be dangerous.
- Revenge: A series of huge losses can lead to anger. Overtrading comes next, to wreak vengeance. The market is a culmination of so many factors that there are no guarantees here. Such an emotion is self-sabotage.
The ability to understand the markets and identify patterns and trends is important for traders, but so is the ability to control these emotions.
Ability to Follow a Proven Method
Consistently profitable traders find an edge and repeatedly exploit it. They do not act randomly but follow a fixed path that has proven successful in the past. There is no place for impulsive decisions in the market, if you want to survive. If one strategy is proving to be a waste of time, you must design another strategy, taking all factors into account, which brings us to the final point.
Awareness is the Key
We cannot stress enough the importance of getting the facts straight. Assessing the global economy and its stability, keeping track of central banks and press releases, looking out for reports of large companies making deals that could create a breakout trend, focusing on a currency pair that is consistently performing well and so on. These are some of the factors you should be aware of, and those who do, possess the attributes of a good trader.