Trading Psychology guide
This article specifically talks about which psychological problems of traders directly affect the losses they make and how these problems can be effectively overcome. More information about effective Forex trading can be found here. If you want to become a successful forex trader then you have to study the psychology of trading.
What is psychology in trading?
Trading is analyzing the market and making decisions based on the analysis made: buy, sell or stay away. And since analysis and decision-making come from the brain, the emotions and experiences that are also going on inside the head can directly affect the trading process. We’re talking about euphoria, impatience, anger, fear, pride. Their influence can be so strong that:
- The trader suffers a loss in a trade despite a correctly made analysis;
- The trader does not enter a position (or does not leave a position) when an appropriate signal is received;
- The trader trades with too large or too small a volume;
- The trader gives too much importance to some factors and ignores others.
Emotions do not always lead to losses. Sometimes they help to gain more profit, but then it is usually associated with unreasonable risks, which is not a sign of professionalism. Traders who have been in the trading rooms of large hedge funds and investment banks (for example, Goldman Sachs) know that psychologists are constantly working there to monitor the emotional state of traders. If any trader shows signs of emotional instability, he or she can be removed from the work terminal.
Fear and greed – the most dangerous emotions in trading
Greed is the excessive desire for wealth. Though there is nothing wrong with having a lot of money (if it is earned honestly), but the passionate desire to get rich quick and easy in Forex or stocks is likely to bring the opposite effect. Greed can dull rational thinking and lead to suboptimal behaviors, such as buying inexplicably large amounts of a financial asset simply because the price is rising quickly.
Biases and errors of judgment
Trading bias is the inability to independently analyze and make an objective decision. There are several varieties of bias.
- Representative bias. For example, objectively, you will have conditions to buy USDJPY. But you’ll reject that trade because you’ve suffered losses on that pair before. And instead of trading the yen, you would choose EURUSD – even though the conditions are not right there, but you have positive trading experience with this pair.
- Negative bias. It means that the trader pays too much attention to risks and tends to see danger where there is none. This can lead to the closing of a profitable trade, even if it develops according to the expected scenario.
- Status quo bias. It means that the trader tends to keep using “proven” strategies or markets, and not take into account new information. This can work for a while, but the danger is that the trader will not be able to adapt in time to the constantly transforming markets.