Trading Psychology of Forex Trading

Trading psychology is the most important part of trading. This is a must thing to know for trading in any financial markets. Trading psychology is the change of perception due to emotion, biases, and other external forces while trading in financial markets.

It has a heavy impact in the forex market as forex market is the largest financial market in the world.

Beating the market is not that difficult but it is tough to stay away from emotions in trading.

We spend too much time to beat the market but too little time to overcome our psychological barrier in trading. The main resistance to trading success is human emotion. This emotion will resist you to execute your own analysis or trading decision.

Effects of Trading Psychology in Forex market :

Traders often violate their trading decisions due to the impact of trading psychology. This is trading psychology, which resists traders to execute their own analysis and trading decisions. As a human being,  you can not eliminate the effect of trading psychology completely but to be a successful trader you must keep yourself away from some major psychological problems. These psychological problems are,

  • Fear
  • Greed
  • Revenge
  • Euphoria

Fear:

This is the most destructive psychological problem in trading which is a composition of worry, fright, alarm and panic. If you do not handle this major psychological problem, properly then it will combine with other negative emotions such as hatred, hostility, anger and revenge which will have greater destructive power. There are two forms of fear; one is fear of losing and another is fear of missing out.

Fear of losing and fear of missing out are related to one another. Fear of losing occurs when a trader is worried about entering into a trade though he has got an entry signal. Fear of missing out occurs when a trader missed one of his entry signal (mostly happen due to fear of losing). This is why a trader should be neutral and should not be afraid of entering into a trade as per his trading strategy.

Greed:

This is another major psychological problem occurs in trading. This is an unusual overconfidence and desire to make big gains in a short time. This problem has a huge impact in forex trading as forex market is a highly leveraged market.

Due to this opportunity of high leverage traders mostly use a high amount of leverage to make significant gains. This scenario can easily lead a trader to a margin call. In most of the cases, these quick short profits are too little to cover up their tremendous losses.

Pride:

Pride is another vital psychological problem and a prime reason of failure for many traders. This is a form of unusual behavior as a trader is too stubborn to refuse his mistakes and possibility of getting the loss. This lead a trader to improper risk management as the trader is unaware about the possibility of loss. This psychological problem leads a trader to a massive loss or margin call as he violates his stop loss strategy.

Revenge:

In some cases,  traders tend to take revenge on the market when their sure trades are against them. In trading,  there is no certainty or a sure thing. It is usual to have some losing positions. This psychological problem is a reflection of pride which happens due to being overconfidence.

Euphoria:

This is a form of greed which appears after a large winner or several winning trades. If you think that feeling euphoric is a good idea, then it might incur massive losses in your trading account. In this case, traders tend to hold several losing positions after a large winner or several winning trades.

Also read : How to Control Emotions While Trading Forex?