What is trading psychology?
Trading psychology, in general, refers to the emotions and mental states that dictate success or failure in trading. Understanding trading psychology is very important in all markets- Forex, Stocks, commodities, etc.
Trading Psychology is considered to impact and affect up to 95% of overall trading success. When we think about trading in terms of psychology, it simply means knowing when to enter a position, when to not enter a volatile market and leave the market alone.
Usually, most traders experience losses because of negative emotions that poison their rational decision-making processes and cause them to make improperly planned trade decisions. Therefore, Trading psychology can make the difference between success and failure in forex trading. Your mental state must be stable in order for you to become a consistently profitable trader. So, how can you control your emotions and ensure they work for you and not against you? By identifying the obstacles to successful trading.
Different Types of Trading Bias
You should psychologically evaluate yourself to see if you are in any way exposed to one of the following forex psychological biases as you trade:
●Confirmation Bias: This is where you tell yourself, “This also proves I am right.”
●Anchoring Bias: This is where you tell yourself this means this, and that means that.
● Loss Aversion Bias: This is where you tell yourself, “I hope the price will come back.”
● Overconfidence Bias: This is where you convince yourself overtime where the market will go.
psychological obstacles to successful trading.
- Fear in Trading Psychology
Fear is the natural reaction we display to threats that could cause us harm. However, in forex trading, fear is harmful when you allow the supposed loss-making threats to cause you to make irrational decisions.
- Greed in Trading Psychology
Greed is the selfish emotion that drives you to want more profits always when trading forex. Greed is even more dangerous than fear. Because every forex trader desire to get large returns from their efforts. However, this desire becomes unproductive and harmful when it’s too powerful.
- Revenge in Trading Psychology
Revenge is another obstacle that obstructs trading success. Revenge trading usually takes place when traders try to make more aggressive trades, especially after experiencing losses. Revenge is harmful in forex trading because
it’s usually not planned well
you become desperate to recoup the losses
it is an emotional trading habit that’s driven by the wrong motives
- Euphoria in Trading Psychology
Lastly, euphoria can also damage your trading success. It is the feeling of excitement often realized when you experience success in the forex market. Your euphoric state convinces you that your understanding of the movement of currency pairs is perfect, and your analyses are faultless.
How to Overcome the Psychological Obstacles
- Follow your trading plan: The trading plan consist of guidelines and strategies a trader can use for executing decision making.
- Invest in forex education; With proper training, you will gain essential skills for making rational decisions
- Practice risk management
- Change your mindset
The psychology of forex trading is an important aspect of becoming a successful trader. For most traders, this is what triggers the biggest percentage of trading mistakes. Therefore, you need to keep your emotions in check. If you ignorantly fail to control them, they will surely control you, and you will regret where it has to lead you too.