Chapter 1 : What is Trading Psychology?
Trading psychology discusses the significance of a trader’s mindset and how to manage emotions, feelings, thought processes, and decisions when trading. According to the trading psychologists, Forex traders have a better chance to succeed in the financial markets if they stay rational and do not yield to greed or fear. They believe that even though psychological stimuli are different for each trader, there are still a number of universal influences.
These include fear, anger, impatience and greed. There’s no doubt that the world of Forex trading psychology is much more complex than that but we will keep it sweet and short for now.
There are risks involved in any and every job; whether you are an attorney, pigeon trainer, waterslide tester, or Forex trader. It’s simply a part of it. And whilst the risks differ for each of these jobs, their goal is the same.
To make money.
Now, let’s say you lost a trade even though you followed your strategy and all your rules. You made sure the price was trading under the major support level or above the major resistance level, and you followed everything on your checklist. You triple-checked all of this and yet you still lost your trade. Well, guess what. That’s not a loss. That’s what we call a business expense.
It is something we are required to pay for being able to trade the market. Controlling emotions that force us to trade
Now that we have explored emotions that make us hesitant to trade, we will take it a step further.
We will explore emotions that have the opposite effect and make us place trades when we really shouldn’t. These emotions include Greed and Impatience.
And while all traders are guilty of these at times, regardless of experience, understanding the logic behind these may limit the snowball effect of trading impediments.
Bulls make money, bears make money, and pigs get slaughtered.
Have you heard this popular Forex saying before?
It basically means that if you are a greedy pig, chances are you are going to lose your money.It may sound harsh, but it’s the truth. Greediness is the worst enemy of Forex traders, and yet it is still one of the most common emotions in the markets.This psychological stimuli usually emerges when traders have a more positive experience during trading and want more of it.
It’s the crack of Forex, really.
Trading psychologists believe that the secret to being a successful trader is to know when to call it quits and take your profits.Only if it was that easy, right?
Don’t let greed overpower your strategy. When your trades are going well, yes, it is natural to be excited about the potential for even greater gains.But it is moments like that when you can’t allow greed to sneak up on you and destroy your trading account.
Instead, stick to your trading strategy.
If your indicators are telling you it’s time to close and take your profits, listen to them. Close your positions, get your profit and leave. Don’t keep your trades going in the hope of ‘making a little more’.
At the end of the day, your trading plan is there for a reason. To take the emotion out of your trading decisions.
And whilst it is easier said than done, it’s crucial you identify the sensation of greed when it comes, acknowledge it, and let it go.
Logic and being rational will take you further than ‘making a little more’.
It’s not worth it. You’re not a greedy pig. Stick to your plan.
Patience is integral to discipline and it is crucial that you have patience with your journey and your positions.However, impatience is a negative psychological stimulus that can lead to failure if not controlled properly.
Instant gratification is a common desire in life, but when it comes to Forex, you gotta be patient. And whilst we all know that the almighty dollar is a moving force in Forex, it isn’t a is a get-rich-quickly scheme and you ain’t gonna become a billionaire overnight.
Impatient traders tend to make rushed decisions and place trade way too risky. In their heads, they are increasing the potential payouts, but what they don’t realise is that they’re simultaneously increasing the size of their losses. And more often than not, such decisions lead to losses rather than gains.
And what happens after? Impatience leads to dissatisfaction, and dissatisfaction can lead to feelings of discouragement and eventually wanting to quit.
When placing trades, it is important you are patient and wait for the right opportunity to enter rather than just jumping into a trade right then and there because ‘you want to’.
As the saying goes, ‘a little knowledge is a dangerous thing’, and placing trades before you’re absolutely certain is a sure route to disappointment.
Instead, trust your analysis, follow your strategy and remain patient. Controlling emotions that hold us back
Let’s talk facts. No matter how strong or level-headed you are, you have emotions.
And naturally, these emotions can influence your behaviour, thinking and decision-making as a trader.The truth is that controlling and managing your emotions when you’re in such a vibrant and dynamic market presents a number of psychological challenges.
Remember all of these Forex trading psychology stimuli we discussed in the previous chapter?
Fear, anger, impatience and greed?
All of these stimuli can lead to the deterioration of your perception of what is really happening in the market if they are not dealt with properly.In this lesson, we will take a closer look at some of the emotions that hold you back when you trade.
These include fear, doubt and anger.
Why is it important we address this?
Because trading psychologists believe that understanding your emotions can mentally prepare you to handle them better.
We’ll explore different areas from how these emotions manifest themselves in trading, all the way through to what we can do to not let them get the better of us.
Understanding Fear when trading
Fear. Or as trading experts call it, the performance inhibitor
It’s one of the emotions that exerts the most influence upon a trader’s performance in the financial markets and has been scientifically shown to “short-circuit” the trader’s decision-making processes involved in Forex trading.
Unless fear is properly addressed and dealt with, it can be the driver of emotional decision making and directly responsible for preventing you from following your strategy and therefore losing on your trades.
Now, that’s what I call the snowball effect.There are two main areas of fear, each with unique negative impacts upon the trader’s performance.
Fear of failure and fear of success.
Fear of failure: Fear of failure associates personal self-worth with losing trades and therefore losing trading capital. It can result in an unwillingness to execute trades and the fear to even enter the markets.
Fear of success: Fear of success is a bit more complex, as it deals with trader’s views towards achievement. Self-sabotage and giving back profits are performance detractors that arise from one’s fear to succeed.
Fear can overwhelm the trader after hitting a number of losing trades or after losing a trade larger than what they are emotionally ready to process.
In such cases, you have to make sure you are not risking more money than you are totally okay to lose.If you are okay with losing the amount of money you have at risk, there is nothing to fear.
Simple as that.And even though it’s pretty much impossible to get rid of fear completely, with some practice, you can learn to react and deal with it better.
You will never succeed unless you try.
Controlling anger when trading
Does trading make you angry? Do losing trades make you furious with yourself?Whatever your answer is, anger is an incremental part of our emotional build.
It’s okay and it’s human to get angry. To an extent.
If you trade angry, it can cloud your perceptions and make you place trades based on emotions, rather than calculations.And when anger overcomes logic, you’re very likely to fail.
For example, let’s say you risk too much money on a trade, and you end up losing it.There’s a good chance that anger gets ahold of you and you are now going to jump back in the market to try and make that money back.And this sort of behaviour is something that mostly just leads to another loss (which is expected since you are trading emotionally again).
Some call it Revenge Trading. Placing trades without any logic behind it, just to seek revenge on the market.
The market doesn’t have anything against you – whether you win or lose. Be like the market.
Don’t trade angry and don’t trade to seek revenge.But instead, remain calm and stick to your plan.
Consistency and risk management will take you further than anger and revenge trading.
You got this!
The ups n’ downs
While these stimuli are certainly natural, to develop successful trading psychology, traders need to determine what they’re afraid of, as well as what triggers them and makes them angry beforehand.
This can be achieved through mental exercises and realising that even though there will be difficulties along the way, you can turn them to your advantage by thinking clearly and not letting your emotions control you.
The first step in gaining a trading mindset involves and mastering your own emotions.
Once you step beyond yourself a little and look at trading objectively, you’ll have a better chance to survive…. and thrive!
Controlling emotions that cloud our judgmentI have been a trader long enough to know a thing or two about all sorts of emotions traders experience in the market.
You see, we all go through similar thinking patterns and emotions as we trade, so it’s important we address these and learn how we can control them.
And the emotions we are going to discuss in this course are of the more dangerous kind because they can cloud your judgment and prevent you from seeing things as they are.
These psychological stimuli include euphoria, regret and stress.
While feeling euphoric is usually a good thing, when it comest to trading, it classifies as a variety of greed which arises after one has experienced a number of winning trades. It can often lead one to become overly confident and enter new unplanned positions, usually in the same direction as the previous winners.
It is for this reason that most traders experience their biggest losing periods right after they scored a couple of winners in the market.And as the saying goes, after the sunshine the rain begins.
Euphoria has its way of making traders feel like their understanding of the movement of currency pairs is perfect and they found a flawless win-win approach to Forex trading.
But in reality, more often than not, it leads to trading errors and losses leading up to the slippery slope. It can often cripple traders’ trading success, cause them to abandon their strategy and go ‘head first’ on the markets without carefully analysing the market conditions.
So how can you ensure that you won’t fall victim to euphoria?
Trading psychologists believe that the best thing to do is give yourself a break after winning or losing a trade and come back to the market on another day. This way, you’ll have enough time to process your wins or losses and analyse the decisions that led to them.
It is also super important to remember that even though it is tempting to jump right back in and try to ride the winner’s wave for as long as you can, you gotta remain level-headed and draw a big, fat line between the momentary sensation and reality.
Allow yourself to feel proud of your success, and make sure you remain grounded in your decisions and every position you enter is preceded by following the steps in your trading plan. This way you will be able to approach every trade with a clear and level perspective.
Regret, also referred to by trading psychologists as the “fear of missing out” often pushes traders to enter into positions, even after the window of opportunity has already closed.
I mean..let’s be honest, we’re all guilty of this..And as you probably know yourself, regret more often than not results in loss as traders are simply too late to enter.
It can often act as a demotivation factor, instilling doubt in one’s mind, blurring their judgment, and eventually leading to frustration and the potential end of trading career.
The key to dealing with emotions of regret is to maintain your trading discipline, follow your strategy, and know that there are other (perhaps even better) opportunities out there.
And remember, even if you’d missed out on an opportunity, don’t let it bring you down.Get back to the market and analyse it with a fresh pair of eyes without considering the burden of the past trades.
At the end of the day, the feelings of regret have nothing on the feeling you get when you win!So what are you waiting for? Go find that winning setup!
There are times in our lives when events beyond our control affect our ability to think clearly.
It could be anything from stress at your work to stress at home or illness…There’s no factor too small.And all these things causing you stress can cloud your judgment and distract you from trading.
So if you’re going through a stressful period, it’s often safest to put your trading on hold until you can commit the necessary time and energy to it again.
After all, the changing nature of the market is stressful and demanding enough.You can always get back to it once you are ready to give it your undivided attention again.
Chapter 2 : Developing a Positive Mindset in Forex
Being a trader is arguably amongst the most difficult career paths one could have.I mean..the constant stress of working under conditions that are full of inconsistency and uncertainties.
I’m not sure if rocket scientists could do it.Us traders are constantly being tested and how we react plays a massive part in our success in the market.We may be swimming in a pool full of pips one day and be 50 feet down in the dumps the next.There really is not much space to get comfortable for too long in the markets.
And that’s one of the reasons why you need to develop a strong, positive mindset and a hell lotta confidence to make it.It takes a lot of personal development to say the least.
Sometimes it may seem like the losses are overshadowing the wins and we start second-guessing ourselves.Personally, I would be lying if I said that I never questioned why I got into trading. Especially when my hair started falling out.
But there is always a bright side of things and it’s important you remember that when the markets start to get overwhelming.It’s crucial you make a conscious decision to be as positive as you can in thinking, acting, doing, and overcoming any setbacks brought on by the market.
So how can you achieve such a positive mindset? Let’s explore below.
Start the day on a good note
Start every day by singing ‘It’s a new dawn, it’s a new day, it’s new life for me Uhuhuhuhuhuhuhuh and I’m feeling good’ …. With enthusiasm!
No, but seriously, a healthy pre-trading routine is key!Getting yourself in the right mindset especially before you start trading in the morning is a step in the right direction.
And if you don’t like singing? You can listen to your favourite song, eat a nice breakfast, meditate, stretch … I could go on and on but you know what works best for you!
And whatever it is, do it! It will help you get in the right mindset and start the day with positive thoughts.
Say goodbye to negativity
Feeling riddled with negative thoughts?Shake them off!Easier said than done, I know but only YOU can change your negative thoughts.
Try approaching things with a positive attitude instead.Remember, the market has its highs and lows. Your trading will have its ups and downs, too. And that’s okay. Why?
Because losses are unavoidable. We all go through them.It’s about how you handle them. So don’t let them overwhelm you and affect your trading. Instead, focus on the good and remind yourself of the reasons that first led you to start trading.
Motivate yourself and stick with it!Here are some of the positive affirmations we use when trading:
- I will manage my trades properly
- I will not be influenced by greed, I would rather trade safely
- I will respect my trading strategy
- I know trading is not easy but I can master it
Bring on the good vibezzz.To develop a positive trading mindset, you need to practice positive thinking.A good way to become a positive thinker is to surround yourself with other positive traders. Perhaps you could find them in our Trading Room?
Speaking positively about the market, your trades, market events will all fill your head with positive thoughts and ideas about the market.Whereas negative talk will only hinder your potential as a trader and prevent you from growing.
Try your best to overcome the obstacles of the market and see them as opportunities to succeed instead.Dealing with these obstacles properly will help you grow as a Forex trader and will go a long way in your overall success as a Forex trader.
Good vibes only!
Consistency and a positive mindset matter. Why?
Traders with a positive mindset are more likely to make confident trading decisions.
You will also learn that a positive mindset will enable you to see things clearer, and help you analyse your trading process, attitude and actions better.
However, the opposite is true of negative traders with fearful, greedy and overall emotionally-driven mindsets. These types of traders often exhibit problems like risking too much money, using too much leverage and simply not learning from their mistakes.
Take a look at this quick comparison between being a positive trader and a Negative Nancy.
Thinking and being positive in your trading will take you a long way. Start with small changes and watch your trading world changed for the better.
And whilst being positive doesn’t guarantee success, it does put you in the right mindset needed to win your trades.
And in the cutthroat jungle that the Forex market is, take every advantage you can get.
Incorporating Trading Psychology in your Trading Journal
Sure, writing down your trade results is great but at the end of the day, numbers don’t tell the full story.It’s not only about whether you won or lost a trade but it’s also important to note how you felt when it happened.
Maybe you’ve caught yourself wrapped up in one of the psychological stimulis we discussed in the previous lessons? Or maybe you stopped yourself from trading based on greed or anger? Whatever it is, it’s time you started a psychological journal! Why? Well, did you know that the financial market has tendencies?
Yup, that’s right and the same way it tends to react to market events and environments, you as a trader also tend to behave in certain ways, either through your reactions or trading behaviour.
And the truth is, we often overlook these tendencies and the effect they have on our performance. You see, through our lives we develop coping mechanisms to help us deal with situations of distress.
For example, the first time you touched a boiling kettle, you’ve learned that it can be incredibly hot. To avoid the same experience and pain, you’ve learned to only touch the handle of the kettle. Eventually, coping mechanisms like these turn into habits and come to us naturally.
But not all coping mechanisms we develop are positive. Sometimes, we develop coping mechanisms that lead us to behave in a certain way and make not so great trading decisions.We are all guilty of this. Seriously, just think about it.How many times have you let go of a winning trade just because the market moved against you for a little while?
Probably more than once.
And afterwards? You were probably beating yourself up about it knowing you could’ve won that trade if you had just followed your trading strategy in the first place.And that’s one of the main reasons Forex traders keep a psychological journal, to help them recognise the negative patterns in their trading behaviours.
Are you ready to start your own trading journal? Below we will discuss some tips to get you started!
Describe what’s happening in the market
Write down what’s currently happening in the market and why you think your trade is going to move your desired direction.
Ask yourself, what the dominant themes of the market are right now. Is your trade a risk? Is your trade in line with your risk management strategy?
If you’re happy with placing your trade once you’ve answered these questions, move on to the next step!
Are you feeling good?
Now that you’ve covered what’s happening in the market and why you believe the trade will go in your direction, it’s time to ask yourself some questions about YOU.
How are you feeling? What are you thinking? Are you going through any stressful periods at the moment?It may feel weird writing about your emotions at first, especially if you’ve never done it before but it will be worth it down the line when you start recognising your behavioural patterns.
It doesn’t matter how small the things that are affecting your mood are, WRITE IT DOWN!
Annoyed because you’re having a bad hair day? Write it down.
Angry because your wife ate the last piece of cake? Write it down.
Sad because your football team lost the game? Write it down.
Frustrated because you’re out of coffee? Write it down.
There’s nothing too small and there’s nothing too big. Write down every little thing, every possible factor that could be impacting your decision-making (even if it is a bad hair day).
Write down the results
Note the outcomes of all your trades to determine the emotions that have influenced your trades whether they’re positive or negative. To find possible issues, you can ask yourself the following questions:
- Did you close early because you were impatient?
- Did you find it difficult to concentrate that day?
- Did you move your stops?
- Did you risk more than you usually do?
- Did you follow your trading plan?
Remember, the goal is to recognise behavioural patterns and their consequences.
Being able to learn from the things that cause you distress is critical and helps prevent these situations and habits from further damaging your trading account.
Once you’ve got enough ‘data’ in, you will be able to clearly identify the impact these behavioural patterns have on your trading account and eventually refrain from them if they re-occur.
The secret to getting over Trader’s Block.Ever heard the term ‘trader’s block’?
If not, there’s no doubt that you’ve heard the term writer’s block at some point in your life.You know, the condition where an author loses their inspiration and the ability to produce any new work?
Writer’s blocks vary in intensity and whilst some last a few minutes or hours, there are some extreme cases out there where the writer is experiencing the writer’s block for YEARS.YEARS!
And the truth is that it can happen to the best of writers out there, like J.K. Rowling. She was open about her struggle with writer’s block when she was writing Harry Potter and the Chamber of Secrets. She said she was unable to write for over five weeks!
But it’s not just authors and writers that can suffer this. It can crawl up on anybody in different shapes and forms.For example, you know the feeling when you’re trying to complete some work but your mind goes completely blank? That’s a form of writer’s block.
So how is this relevant to trading?
Well, just like writers, traders get these blocks too. They’re called Trader’s blocks.
Forex Trader’s Block
Forex traders’ blocks normally occur after a significant win or a significant loss and can be triggered by various reasons. To mention some, traders feel like they will never be able to replicate their last successful trade, or they fear another huge loss.
The truth is, when the trader’s block crawls upon you, you’ll feel paralysed, riddled with fear and unable to act. You’ll find yourself sitting there waiting for the perfect trade that doesn’t exist.
If this ever happens to you, it’s important you remember that you’re not alone and there are lots of other traders out there going through the same thing.
Don’t automatically think the worst. Instead, take some time for yourself, relax, and try not to let it worry you too much.
Tips on dealing with Trader’s block
Before we dive into the best ways of dealing with the block, let me quickly mention what NOT to do.The single, most important thing that you should avoid if you’re dealing with the trader’s block is to force it.
Don’t place trades just for the sake of it, regardless of market condition or analysing the market.Yes, technically it would mean you are trading again but really, you’d just be gambling.This kind of behaviour will only cause more harm and lead you to more losses.Now that we got the worst-case scenario out the way, let’s talk solutions.
Take a step back and relax
Seriously, just take a breather. It might be just what you need!
Switch the computer off and take some time for yourself. Do the things you like to do.
It doesn’t matter whether it is taking a relaxing bath, doing a puzzle, playing video games or just taking a nap.
You know what works best for you to clear your mind. The goal is to distract yourself!
Sometimes the best thing to do is to reset and restart.Perhaps you need a new strategy? Or maybe your old strategy needs a refresh?
Whichever option it may be, sometimes re-doing and re-learning is the right way to go on about things.Really, just take your time to review your strategy in its entirety.
And if you feel like you can make it better? Adjust it based on recent experience.It will help you get your confidence back and remind you of things you have forgotten about.
Slowly dip your feet in the water
Now that you’ve cleared your mind and went back to the basics, it’s time to look at the charts again. Spend some time analysing the market and remember all the steps in your strategy.
Once you’re confident you see an opportunity, take it!Push yourself to place that trade.
Even if it’s a small one!It may be hard at first but eventually, these small steps will make big difference in the way you approach trading.
What is The Cycle of Doom in Forex?
Looking back to when I first started trading… well, it was an experience and a half, to say the least.One day I thought I was the best trader to have ever existed, and the next I never wanted to look at the stupid chart again.
It was an emotional rollercoaster and it is needless to say that the money was going out much faster than coming in. My Forex game was comical. An absolute disaster. But don’t get me wrong, I didn’t think so then, I only do now.
Every time I lost a good trade, I went and got a new ‘’’’’’ better ’’’’’’ strategy. On a couple of occasions, I even paid for them.
Yup, I did.
And then I got overly optimistic, naive, wasted more money and went back to square one. Or in other words, I had fallen victim to the Cycle of Doom.
What is the Cycle of Doom?
The Cycle of Doom can be described as a stage in one’s trading career where Forex traders start being profitable using their own strategy, followed by big losses leading them to abandon their strategies and consequently searching for a better trading system.
To put it simply, let’s say it’s you going through the Cycle of Doom. You got yourself a strategy.
It doesn’t matter whether you created it yourself, copied it, found it online or bought it from a farmer in India. You pull the trigger and off the bat, you win a trade. And then you win another one. And the one after that!
You’re making some real $$$ … Things are going G.R.E.A.T !!!
What happens next?
The wins are replaced by losses. A lot of them. And the problem?YOUR STRATEGY FOR SURE….. right???You start panicking and decide it’s time to tweak and optimise it. You add some minor changes here and there and off you go again, with a ‘better, more reliable strategy’.
You win a couple of trades before you’re hit by the losses… Time to adjust the strategy again? Yup!
The same thing happens and eventually, after tweaking it hundreds of times, it’s time to get a brand new strategy to replace the old one.
And then you go round and round the circle, or as we call it in Forex, the Cycle of Doom.
Changing strategies in the hope that you’ll find the Holy Grail. Well, guess what, it doesn’t exist!
Overcoming the vicious Cycle.Let’s state the obvious. You are in the Forex market to make money.
And there’s absolutely no chance you will become a consistently profitable trader if you go changing strategies every time a trade goes against you.
If anything, this is a great way to burn through your capital. In order to make money, you need to have a good strategy and stick with it!It is super mega important you’re confident in your strategy, even if it goes against you sometimes.And if you’re not confident in your strategy? Backtest it!
Seriously, fully backtest it. Put it through all the historical data and properly determine what works and what doesn’t.
Remember, there is no such thing as a perfect trading strategy… even if online ‘gurus’ trading from the beach tell you so.
You will stumble upon some losses along the way but before you go changing it up, ensure you always ask yourself WWALD.