There is absolutely no doubt that mastering trading psychology makes the difference between becoming a highly successful forex trader or just another person who fails to make the grade. It doesn’t matter how great your trading strategy or system is if you are unable to properly execute it. Over the next few weeks we are going to look at various aspects of trading psychology and resources that can help you in mastering yourself.
Preconceived Ideas in Forex trading.
One of the most overlooked aspects of psychology is the influence that preconceived ideas / notions can have on your trading. Coming into anything, particularly a field such as foreign exchange trading with fix ideas / convictions will inevitably shape how you will react in pressure situations and will undoubtedly set you up to fail. Below are a series of statements that reflect common thoughts that a trader might experience while trading.
“You can only predict the markets over the short-term”
“You can only predict the markets over the long-term”
“Forex trading is difficult”
“Forex trading is easy”
“Technical analysis works”
“The stochastics are overbought so the market is likely to go up”
“There is resistance at 0.92080”
“Trading Forex is risky” The Power of Beliefs :Van Tharp
The key element in trading is to understand that you have absolutely no control over the market. The forex market itself is work over $5 trillion dollars, any trades you make are less than in consequential. In all of the above statements though there is a suggestion that you do in fact have some control. In believing or think in this manner you are sure to fail because the market itself can change at any second.
The problem is that beliefs such as the statements above shape our actions. Take the last statement
“Trading Forex is risky” if you trade with this belief it is likely to become a self-fulfilling prophecy. You perceive that it is risk and this shapes your approach. It is likely that you will fall into the classic situation of allowing losses to run and taking profits too quickly in an attempt to avoid loss.
Successful currency trading is in fact based on calculated risk which itself is based on probability. A successful trader starts off with the notion that no two trades are the same because no two set of trading circumstances are identical. Just because a certain chart pattern worked once doesn’t mean it will work again. A good trader looks at the overall probability of a specific type of chart pattern being successful. He will look for types of trades where his potential profit will outweigh his risk by a large enough amount so that the result of an individual trade is immaterial. A trader has absolutely no idea whether a trade he enters will be successful or not. Many of the most successful traders in fact lose far more often than they win, but they make money. Why? Because even if they are only right 40% of the time if the profit is always at least twice the potential risk then they will make money.
Traits of successful traders
They take complete duty of their actions in the market
They comprehend that position sizing is the key to reaching their trading objectives
Although they might lose more times than they are win, they will still make money on the forex market though robust risk reward
Trading is not a hobby but a profession. Their participation in the forex market is a serious pursuit.
They recognize that losses are an unavoidable element of trading, and they accept each loss as it comes and prepare to look for and trade the next signal
Detailed record keeping of their results.
They shape their trading around and are comfortable with pre-determined risks
They know that they can profit from the forex market
The confidence they have in their forex trading strategies is proven and un wavering.
How to substitute one set of beliefs for another?
The one area in which we have to reshape the way we think is our attitude to loss. If we can change our approach to the way we understand loss, all the other changes to our belief system can flow from there.
The hard part is that our conception of loss and risk is embedded into us from birth. It becomes an innate way in which we react to the prospect of loss. Somehow we have to separate the way we view loss with regard to trading as opposed to the way we see loss in other aspects of life.
The only way to achieve this is through habit. Have you ever got into a car and driven or started to head in the wrong direction to the place you want to go while think of something else? Most drivers have! The reason is because you have got into the habit of turning left to go to work at 7.30am each morning and the day you want to turn right and head into town, if your thoughts are elsewhere when you reach the junction habit will take over.
The key then is to get into the habit of accepting a loss. How can we do this? One successful method would be to initially blind trade a demo account. Everyday pick any pair take a trade then look at the chart and set a stop and a limit to twice the value of the stop. After a couple of months, once used to this move on up to a small micro account. Put a small amount of money in it and mentally write off the money then trade it in the same fashion as the demo for another couple of months if possible.
By doing this you are trying to form a habit that will supersede your existing trading habits. Now, when you go back to trading your main strategy you will find that you have become quite robotic in the way you take your trades and the loss will just become part of the process of success.
Think of this process as training, in the same way a sportsman would train for his event or game. Working on specific aspect to form habits so that when they have to perform on the day or in their arena it is second nature.