Trading psychology is a critically important topic for traders to learn about early in their trading journey because if you don’t understand the role that your mind plays in trading, you will be stuck in a cycle of never-ending trading mistakes and account blow-outs.
Trading, perhaps more than any other profession in the world, is an extremely cerebral endeavour. Meaning, most of what you ‘do’ while you are trading, takes place within your own mind. If you do not properly control your mind, you stand absolutely no chance at making consistent money in the market, in fact, you will almost certainly lose money if you don’t understand and control your mind.
From my experience, it has become obvious to me that whilst most traders are aware that psychology is an important factor in trading, very few of them focus on it enough. Trading psychology falls into the same boat as money management for many traders, that boat is the “I’ll do it later after I start making some money in the market” boat. Unfortunately, this boat never comes for these traders, because it’s impossible to make money in the market if you don’t make a proper and conscious effort to master your trading mindset.
You have probably heard that a lot of people who attempted Forex trading end up losing money.
There’s a good logic for this, and the reason is primarily that many people think about trading in the altered light.
Most people come into the forex market with unrealistic anticipations, such as thinking they are going to leave their jobs after a month of trading or thinking they are going to convert $1000 into $1,000,000 in just a few months.
These unrealistic anticipations work to promote an account-destroying trading mindset in most forex traders because they feel too much tension or “need” to make money in the markets.
When you begin trading with such “need” or pressure to earn money, you enviably end up trading forex emotionally, which is the fastest way to lose your fund.
The emotions of trading
To understand and then eventually conquer your trading psychology, you need to have a thorough understanding of the major emotions that you’ll undoubtedly experience as you trade the market.
Note: these emotions mainly apply to trading a live account, demo trading does not bring out the same emotional and psychological reactions in people because there’s no real money involved.
Greed – There is an old saying that you may have heard concerning trading the market, it goes something like: “Bulls make money, bears make money, and pigs get murdered”. It means that if you are a greedy “pig” in the market, you are almost inevitably going to lose your money.
Psychologists have made profiles of many professional groups such as the police, pilots and firemen. It is becoming more and more frequent that businesses of all sorts are beginning to request job applicants to undergo psychometric tests to see if they are suitable for the job. In these tests, certain personality qualities are seen as more desirable than others for particular lines of work.