Understanding Forex Trading Psychology-5 Easy Steps To Control Fear and Greed
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Just like in any other industry, topic or initiative, psychology is an important matter. If you want to understand the psychology behind anything, you will have to know general psychology. This does not mean that you need to attend a college for psychology before starting to trade. However, if you understand feelings like fear, rush, patience, cold blood and self-control, you will be able to anticipate what would do the majority of traders in certain situations.
When you trade on the virtual platform and you lose a transaction, you might even laugh thinking about how naive you were not to close the respective order in time and 1000 virtual $ lost is not a tragedy. However, just think about what would happen if you lose that money on the real platform. You cannot really compare this, as when you are on the real platform, your trading would not look like the one from the virtual one.
Fear
Fear is obviously a necessary emotion, but only when used in the right quantity. When it becomes too great, it stops us from doing transactions that are considered too risky and prevents us from taking decisions that might be in our advantage.
The rational fear of a trader is that he will make a transaction that will cost him money and no one wants to be in that situation. This fear can make the trader to be passive on all trades he encounters. If he loses money on a transaction, there is a possibility he will have great doubts about making the next one, which can prove to be a winning trade that will cover all the earlier loses. In this situation, the trader has a net loss although a profitable trade was available for him.
This emotion can be overcome by the trader making the acknowledgment that everyone will have a losing trade from time to time; the most important thing is not to be afraid and to make sure they are less often than winning trades.
Greed
The opposite emotion to fear is greed. It's the feeling that makes us take decisions we would not normally do. Greed is necessary in the right amount, as well as fear, because it keeps us motivated to work on an idea. Too much greed can become very harmful and lead to bad choices that normally aren't being taken into consideration. It can make the trader perform random transactions or hold on his position longer than the system recommends.
If a trader observes a market moving upwards strongly, he might be tempted to make a transaction, despite their trading system telling them not to. This is a classic example of letting greed to get the best of you. In most scenarios like this one, the buying takes place at the end of the move and that will result into a losing trade. This is why it's very important to have a trading system, to test it, trust it and follow it. You will make a profit without looking at every possible trade and avoid letting greed taking control.
What is Trading Psychology?
The trading psychology has an important effect on the minds of all traders. While general psychology is used to analyze the human mind on the other hand the trading psychology analyzes the actions and reactions of traders in front of their computers.When you trade on the virtual platform and you lose a transaction, you might even laugh thinking about how naive you were not to close the respective order in time and 1000 virtual $ lost is not a tragedy. However, just think about what would happen if you lose that money on the real platform. You cannot really compare this, as when you are on the real platform, your trading would not look like the one from the virtual one.
How is Trading Affected by Trading Psychology?
You have to choose the right markets to use the right trading systems and have the right tools in order to be a successful trader, but in addition to that, you need to be in a perfect emotional and psychological state of mind. You don't want your emotions to have the biggest impact on your trading. They can even prevent you from making a transaction at all. Greed and fear are the most common emotions a trader has and he must learn to manage and control them, because removing these feeling completely is almost impossible.Fear
Fear is obviously a necessary emotion, but only when used in the right quantity. When it becomes too great, it stops us from doing transactions that are considered too risky and prevents us from taking decisions that might be in our advantage.
The rational fear of a trader is that he will make a transaction that will cost him money and no one wants to be in that situation. This fear can make the trader to be passive on all trades he encounters. If he loses money on a transaction, there is a possibility he will have great doubts about making the next one, which can prove to be a winning trade that will cover all the earlier loses. In this situation, the trader has a net loss although a profitable trade was available for him.
This emotion can be overcome by the trader making the acknowledgment that everyone will have a losing trade from time to time; the most important thing is not to be afraid and to make sure they are less often than winning trades.
Greed
The opposite emotion to fear is greed. It's the feeling that makes us take decisions we would not normally do. Greed is necessary in the right amount, as well as fear, because it keeps us motivated to work on an idea. Too much greed can become very harmful and lead to bad choices that normally aren't being taken into consideration. It can make the trader perform random transactions or hold on his position longer than the system recommends.
If a trader observes a market moving upwards strongly, he might be tempted to make a transaction, despite their trading system telling them not to. This is a classic example of letting greed to get the best of you. In most scenarios like this one, the buying takes place at the end of the move and that will result into a losing trade. This is why it's very important to have a trading system, to test it, trust it and follow it. You will make a profit without looking at every possible trade and avoid letting greed taking control.
How to Control Fear and Greed?
If you are a beginner trader, you don't have to expect incredible results in a matter of seconds. Sure, you have probably reached the website of a Forex broker by clicking an ad that says "I made 200 dollars on my way to work". Marketing for Forex brokers is a powerful tool, the most important incomes for those come from the traders that are swept away by those promises, and as soon as they deposit some money, they would risk it all on a single transaction. We must tell you from the start that money can be made in Forex, but not by those traders. Here are the basic rules of control, which would allow the beginners to control their greed and fear and to learn trading before actually trading.1.Don't Over Trade
If you insist on entering the market with one position after the other, just because you have seen half of a signal, you will probably lose more than you win. Over trading is the general feeling of the market, which is best exploited by advanced traders, as they can easily take the money of beginners that give it away because of emotions.2.Don't Take Too Many Risks
The best traders are those that are able to follow trends, not to fight against them.If you take too many risk and you can lose your entire account with one single trade.If you have 50USD in your main account and place a trade with 2 lots in an standard account,you will lose your account if the price move up only 25 pips.3.Don't Close too Soon
some traders will close their positions as soon as they made some profits.This might be a good idea for a beginner, but what if you see the chart going upper and upper, and you are not there to take advantage of this great slope? The stop loses are great methods to make sure that you get solid incomes, without taking too much risks,as long as the chart goes in your direction.4.Counsel Yourself
The charts and market directions might be found in financial news feeds and on the Forex platform,but self-education is in your head. As you can never go to a psychologist to explain him that you are not able to resist in front of a doji with a long wick and with a favorable moving average on the EUR/USD pair,as the psychologist would probably not understand what you are saying. You are the only one responsible for creating your own Forex education.5.Find a Plan
The majority of retail investors lose money on the Forex market because they are greedy and fearing. If you have a solid plan that was proven as effective many times on the virtual platform, you will have to stick with it no matter what. Even if the market is against you, close the position to limit loses and to wait for a better period to enter the market. There is no guarantee for success, but you should know that the best Forex traders lose more than 50% of their transactions. If you have a percentage around this number, it means that you are OK.- A Detailed Descriptions of Recognizing and Controlling Your Emotions in Forex Trading
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