Forex Trading Psychology for Beginners
Any trading strategy will be absolutely meaningless if you cannot manage your emotions and have not developed a special, trading psychology. You must have three basic components: intelligence, money, and method.
It absolutely does not matter how much experience you have had in trading forex if you do not understand how the state of mind affects trading and how emotions can lead you into trouble. Failure to do so will result in you never making money here. Therefore, you need to make a conscious effort to manage your emotions while trading. So that you don't make gross mistakes. For example, to enter the market when there's no suitable set-up or to risk too much.
Without a conscious attempt to understand yourself, your mindset, and your emotions, the market will simply chew you up and spit you out so fast that you have no idea (according to brokerage statistics the average forex trader loses all of his money within 6 months).
Fundamentals of Forex Trading Psychology
It's not a secret that beginners tend to be tempted to take profits as soon as they appear. Usually, novice traders are not patient when the price reaches the target level. They act like the kids seeing candies.
The opposite pattern appears when a floating loss is generated. Beginners hope that the price will turn in their direction, but the loss (as if by chance!) increases to a critical size. The well-known trader's wisdom "Cut losses, let profits grow" says just about this.
Below we will consider several important points revealing the essence of psychological problems in trading.
Fear in trading is the most varied: let's say, fear of losing money, fear of being wrong, fear of the unknown, fear of making a wrong move, or the strongest fear of opening a trade.
Fear paralyzes and leads to collapse, depriving the trader of his mind. It can be managed if you control your emotions and endless petty worries. Try to remain calm and concentrated.
Your task is to accept one loss after another, without completely changing your trading method. Experienced traders act despite their fear. Protect your capital with money management, use Stop-Losses. Remember - every trade will not be profitable.
Prepare in advance to accept all financial risks of an event over which you have no power - that is the secret of psychologically sustainable trading.
After all, trading is a game of probabilities, nothing is ever certain.
Don't constantly try to generate successful trades instead of taking losses with your system. If you have 5 unsuccessful trades in a row, slow down, sort out the mistakes and make a 6th. All methods have losses, and you are not a loser at all just because a few trades resulted in losses. Don't take it personally, don't beat yourself up and tear your hair out because you did something wrong. Mistakes happen and will happen, it's the market. There are no perfect traders here, so don't blame yourself. Any loss of money is simply the cost of doing business for the trader.
Don't tell yourself "I should have traded better" or "damn, I should have entered this move" or "I should have made so many dollars this year by now." Throw negative thoughts away from yourself, focus on what you intend to accomplish. Constantly test and improve your trading method so that it allows you to earn more than you lose.
- Trade only with the money you can afford to lose.
- Set yourself only realistic goals.
Do not try to achieve some fabulous success in your first year. Trade calmly, don't get emotionally attached to what you're doing, be detached. Understand what you are doing right and what you are doing wrong.
Traders who work in an aggressive manner open too many trades or hold them so long that the market goes against them. Don't get greedy on every trade, because you will see - the right opportunity will come very soon. Don't try to solve all your problems with one big trade.
When greed attacks a trader, most of the time he does not even realize it. Often it appears when you look at a nice open position and think how much more money you can make if it stays open. However, it's a trap - an open trade is in the market, you haven't gotten anything out of it yet until it closes. And until it does, you have no profit - just its potential. Traders often confuse money in an open position with "real" money already in their pocket.
Ignoring the obvious fact - money in an open position is infinitely far from real profits. That's why traders are constantly lowering the Take Profit level as the price gets closer to it. And this, in the end, will result in less income than originally planned, or you will get nothing at all. Greed is ironic because it will cause you to get a lot less money than you wanted.
If you have a risk/reward ratio of 1 in 2 or 1 in 3 for a trade, and the price comes close to your target, you might move it to make even more money, because you think the price will go further. That's greed, and it will only result in you getting much less than you would have if you got out where you planned beforehand.
We understand - it's hard to exit a trade that looks so good and in your favor, but that's when you have to close it. Many traders overbid trades, drag their Take Profits, or put them at completely unrealistic levels. It's all greed and it will take your money.
Hopes and Expectations
Hope is the expectation of something to happen or a strong desire for a certain outcome. When traders place orders with hope, they often make it the basis of their trading. Hope causes traders to move their Stop Loss further away or remove it altogether because they think the market will turn in the right direction and they will not lose this trade.
Hope collaborates with greed, the trader sets himself unrealistic profit targets and constantly increases Take Profit. All of this will end predictably - the trader will not make enough profit that he could have taken because he wants more and more.
Traders often wait for the price to go in the wrong direction to turn in their favor. This is a dangerous approach, because they start dragging Stop Losses farther away from the original price, or remove them altogether - as a result, the deposit is wiped out in a matter of days.
It is very silly to expect that every trade will be successful.
When a trader hopes that trade will pay off in his favor, he also expects a certain profit, and this leads to a lot of emotional mistakes. After all, you expect things to happen, and when they don't - sadness, anger, and regret will overwhelm you.
It's extremely important to just look at each trade realistically and realize: even if you have an effective trading system, every trade will not be successful. You will have a continuous string of successful and unsuccessful trades, and if you learn how to manage your money if you don't over-trade, and if you understand the risks, the advantages of the trading system will work out.
If there is to be hope for something - it is only that by following your strategy and money management skills you will be able to close the year in the black. And it is useless to count on the successful completion of each transaction - it will not happen.
A complacent trader opens trades too often or takes big risks. Remembering what a successful pattern was last time, there is no need to jump into it, again and again, trying to repeat that success and experience the sweet feeling of a winner again.
Euphoria is a very dangerous emotion, it makes you believe that nothing bad can happen to you. Since trading is a game of probabilities, traders regularly feel this "buoyant" feeling and believe that mistakes are impossible. But this is a temporary effect. A trader who gives in to it will make a lot of mistakes, take too many risks and lose everything that was earned before.
You need to pay attention to yourself after both unsuccessful and successful trades. Traders give back to the market continuously what they have earned. In fact, beginners often have their first successes, but they quickly become complacent and careless. Their perception of risk vanishes after a few profitable trades, and they start making mistakes - taking too much risk and over-trading. As a result, all the profits are given back, and then some more. Thus begins a vicious circle of emotional trading, the result - complete "sinking", the loss of the entire deposit.
Stay disciplined, despite all the emotions that you'll experience after getting successful or unsuccessful trades. This is all that is required of you - constant self-discipline. Concentrate on your trading system, strictly adhere to risk and money management. Don't just increase the size of your trades. Only after you have doubled and tripled your deposit you can increase the volume of your positions. Many traders increase and increase the risk with every trade because they haven't gotten used to controlling it emotionally yet.
There is a huge difference between real confidence and self-confidence, arrogance and carelessness.
Successful traders develop confidence by constantly applying and testing their trading methods until they have thoroughly ascertained their effectiveness. That means sticking to the plan and NOT over-trading, not risking much, despite all those feelings you have about every trade.
Real confidence will only come to you when you diligently execute your trading plan for a sufficient period, even if the market is constantly going against you. This is just a reason for persistence and improvement. Once you develop true trader confidence, you can do it all - make and live from consistent profits.
Inability to Pull the Trigger
As a forex trader, you naturally want your time and nerves spent in the market to pay well. To make money, you need to work the market and make quick decisions. Otherwise, the trade will pass you by and you will enter the market at an unlucky moment, say, at the end of a trend. The entry should be accurate, firm, and conscious. No need to doubt, to engage in self-consideration and over-analysis.
You'll always have doubts about the outcome of a trade, it's inevitable - that's what trading is all about.
So just follow your trading plan, control your emotions, don't trade with deliberate excuses for failure. You're required to be both prepared in advance and fully aware of what you're doing. Develop useful trading skills. Wait until you've got a clear, comprehensible price action set-up, and then get in the trade. Your mind must be in control.
Exiting a Trade too Early
Some traders start running away from a good trade at the first sign that the market is pulling back. And then, when the price goes back in the direction of their choice, the trader is overcome with emotion. So - successful traders, believe it or not, wait for what they have planned. Price always goes in waves and will go in waves, that is its nature. There will always be pullbacks and you have to expect it. Price will never move in a straight line for too long.
Sometimes traders close trades in forex once the price has reached 5 pips, 10 pips, etc. They could make a ton of pips if they let the price go their way.
Many successful traders open a trade, set a Stop Loss/Limit Order, or Take Profit and just walk away. They go watch TV, go for a walk, play with the kids, play Playstation. They let the trade run its course and don't let themselves get in the way of it.
If you interfere with your deals without logical reasoning, without price action instructions, it will all end very badly. Resist the temptation to do so with all your might. Stay disciplined, stick to your plan and give your trades a chance to work out!
Trading Psychology Tips for Beginners
Over time, traders develop both good judgment and trader's intuition based on experience. So - don't give up. Your trading will inevitably improve over time if you are persistent enough.
Sense of the market develops - it's not magic, it's a simple experience.
Such a checklist (or your trading plan), helps you not to miss a set-up or trading situation that you should notice. Using such a list, you will gain more confidence in your trades. Write down your entry criteria on it and stick to them, and stay disciplined. All of this, over time, will build positive trading habits right into your mind.
Discipline and working clearly on your system/trading plan will transform your mind - patience and discipline will become your second habit and these are necessary, basic criteria to achieve consistent, rather than situational, success in trading.
Enhance Your Skills
You have to love it - look for patterns, see how they work out, keep testing them, look for new opportunities. Most professional traders love trading not for the money - but for the process.
Money in trading is just a bonus for doing something exciting.
Trading for the pros is exciting, interesting, uplifting. They steadfastly follow the rules and work the way they should.
A trader must enter a trade when the right signal, which meets all the criteria, has appeared. Do not wait. Do not doubt. A Stop Loss is calculated in advance. If there is no signal - you wait.
Do not deviate from the developed method once you've started using it. Work with this method over and over again until its full potential is unleashed. Only repetition will solidify success and the right skills.
Discipline is your ability to follow trading rules, manage your emotions and money. And the market will reward you for it - but only the most diligent ones.
A trader must love what he does. Love the markets and his trades, successful and unsuccessful. He must be willing to do whatever it takes to achieve his goals.
Commitment ensures that you get through a period of unsuccessful trades and still come out in profit. All successful traders are very goal-oriented, disciplined, and ambitious people.
Avoid distractions from friends and family. Don't try to learn hundreds of trading systems and techniques, focus on one thing and excel at it.
It's a very trait of traders to constantly crave more and look for "something easier" and easier.
People lose money and think they've made a mistake. This is an extremely negative way of thinking. If you surf the Internet in search of a "good" strategy, reading other people's methods, you will not be confident in what you do, all trading signals will pass you by, and your head will become a mess.
The greatest discovery that helped many people traders become successful traders is that there is no need to trade often to get a good monthly income. We think 6% of a deposit a year is good money and 12% for a retirement fund is great.
So why do traders want to make 100% a week?
What's wrong with making 5-10% a month? That would make a great percentage over a year. No one, of course, can guarantee you a steady monthly income. However, it's enough for you to understand that slow income growth is much more stable than fast income growth. Only gradually increasing profits you can work here for years.
Know How to Wait
By trading on daily charts, you will see the big picture of the market, and avoid the temptation to enter it over and over again, a typical mistake of beginners, who use low time frames and open dozens of positions a day. Especially, it is necessary to calm down, especially for beginners - go to the daily or 4-hour charts, only they give the best view of the market.
You do not need to trade every day to get a good monthly profit.
Some traders consider themself a market sniper: they wait, wait, wait and wait, sometimes days, sometimes weeks without trading, just wait. And then they see a price action set-up, which is simple and clear, it's like a green light.
To master the art of waiting thoroughly and to form the right, trader's mindset, you need to understand that only patience will help you develop positive trading habits. Emotional trading will only give you negative consequences. Only by learning patience will you understand how to use your "bullets" wisely. And that you only need a few good trades a month to get a good income.
You can get there with patience. Because that's how you track your prey.
The other world is when annoyed by continuous failures, traders sit around the clock at the charts, like frenzied zombies who just can't understand - over-trading won't get better.
Trade by simple and clear rules - so you will be able to make money stably. Income will float from week to week and yes - you will sometimes lose money, both week to week and month to month. Try to wait for as much as possible rather than sit in the market.
Patiently wait for the right conditions, wait, then open trades and go for a walk. Stability is a combination of all the conditions for successful trading and meeting them day in and day out.
This is not the finale - it's just the beginning. This is where your real trading begins. You will enter the world of trading and from here on everything is in your hands. You can study at this school and come back to repeat the aspects you want, or you can not.
However, we would recommend you to reread it regularly, including this lesson on psychology. Because psychology is at the heart of everything.
Don't ignore it, please. It's something that cannot be mastered perfectly because trading psychology is a continuous process of self-improvement. It is a regular reminder of how much emotion affects your trading and that you must not let it get in the way or you will lose money.
Remember - we make our money by speculating on changes in market prices. And we spend our hard-earned money doing it. So yes - you will be nervous and there is no getting away from it, even if you control all the risks. The only way to get rid of the negative effect that emotions have is through conscious effort. We can guarantee you - you will not acquire this skill on your own.
Regularly read your trading plan and, after opening a trade, step away from your computer/trading platform. Give yourself a chance to calm down and collect your thoughts. By studying that, you are taking exactly a conscious step in dealing with your emotions. The more actively you manage your emotions and psychological state, the better your trading results will eventually become.