Every forex trader will at some point have to face a particular set of fears that will sometimes mean they fail to pull the trigger on a trade. A lot of people talk about missing a trade as some significant moment in their trading activity. They look at the price movements of a currency pair and think it might go a certain way, they might even have an idea of the price it might reach, and they watch it and watch it and lo and behold it goes the way they thought but they didn’t enter a trade. They look at situations like that and hypothesize that they could have entered a trade at such and such a time and then if they had closed it at just the right time, they would have made x amount of profit. But the thing you have to realize is that while we all might fantasize about phantom trades like that from time to time, they are a non-event.
They are truly unimportant in the grand scheme of things because, in reality, nothing happened. You could spend your whole time dreaming up phantom trades like that. You could watch stocks and see potential trades you could have made, you could watch exotic currency pairs you’ve never traded before and see “opportunities” where you could potentially have made thousands, tens of thousands or hundreds of thousands of dollars on a single trade. It didn’t happen. It’s nothing for you to think about, much less worry about. You will miss trades like that literally while you’re sleeping. We all do. Let them go.
One particular reason you should let them go – apart from that way of thinking being completely useless to you – is that there are many more important psychological phenomena for you to worry about. When you ask them about forex trading, most people – and even plenty of traders – would probably tell you it’s all about understanding charts, learning tools and indicators from books, and understanding the theory. Indeed, it is all of those things. But it isn’t one of those processes where you can put in A and get out B every time.
We are, whether we like it or not, squishy ape-like animals that have evolved to be good at a lot of activities but being cold, unemotional machines is, unfortunately, not one of those things. As with anything else in life, our psychology is a big factor in how we perform. As a result, understanding your own psychological or emotional responses to different situations is a key step in being able to control them or curtail them when you need to and to stop them from inhibiting your efficacy. In fact, it often tends to be the traders who think of themselves as unemotional and unaffected by psychological ups and downs who turn out to be the ones who struggle most in certain situations.
Trading has a myriad of ways of drawing you into an emotional response – sometimes when you least expect it – so understanding those potential pitfalls and being aware of your emotional state enables you not only to learn about yourself but also to avoid making the same mistakes again and again. For example, you might be able to explain to a small child that it shouldn’t do something stupid, like touch the flame of a candle, but its only when it realizes it for itself that it will internalize that lesson.
Pulling the Trigger
The moment in a trader’s day that is most fraught with psychological turmoil is when they have to pull the trigger on a trade they’ve planned and for which they have a trade signal from the system they have built up. Not, as in the earlier example, when they think about a potential trade but make no moves towards it. For want of a better way of putting it, the really scary moment is when you have run the numbers, analyzed the price activity, found an entry point, established your target, zeroed in on your timeframe, and set up your stop/losses. Once you’ve run through your whole checklist and even gone as far as opening an order on your trading system, you’ve reached the moment of truth. Do you click the button?
Now, anyone who’s been trading for any significant amount of time will have, on occasion, been wracked by doubt and backed out at this point. Not to put too fine a point on it, they will have chickened out and missed their shot. The sheer tragedy of doing that can unfold very quickly if the price moves the way you expected it to and you watch what could have been a successful trade slip away. Quite apart from really bumming you out, a missed shot like that can have several other knock-on effects. It can slide itself into your subconscious mind and affect the way you think about future trades. Without knowing it, you might still be having lingering thoughts about that moment not just when you make your next trade, or your next couple of trades – it can persist well into your next month of trading, or even longer. The fear of missing an opportunity like that is no small thing and it really can cause issues for your future trading, which is why it is important to have some self-awareness about it and to try to understand what happened.
Being Your Own Shrink
So what are some of the psychological causes of chickening out? A side note here, if chickening out is a bit of a strong phrase and makes it a little harder for you to think clearly about the issue at hand, try thinking about it as failing to pull the trigger instead. One of the big causes, for most traders, is a fear of failure. You look at the trade you’re about to make and you just feel unsure about it. Of course, all your indicators might be screaming at you to trade right now but sometimes – and we all feel like this from time to time so it’s nothing to get too concerned about – sometimes it just doesn’t feel right for whatever reason. There are ways to overcome it and they are pretty fundamental to how you understand forex trading, so don’t worry, we’ll get to them.
In the meantime, another possible reason people don’t enter a trade, when they otherwise think they should, is over-analysis. This is a bit counter-intuitive since analyzing the technical parameters that lead to a trade is pretty much the bread and butter of most traders. That said, there is such a thing as overthinking it. Some of us love nothing more than to get deep into understanding what causes a given currency pair to move the way it does and, for the most part, that makes us stronger traders. But there’s a flip side to doing too much research because the deeper you get and the more information you try to include, the greater the likelihood that some of that information is going to start contradicting itself. Sometimes you’ll have filled your head with so much reading about news events and looked at so many indicators that some of that begins to cause you to doubt yourself. And not only will you begin to doubt yourself, but you will also – just through the sheer act of spending so much time thinking and analyzing one trade – become too invested in it emotionally.
Yet another form of this is becoming unsure about your analysis in the first place. On one hand, this can lead you to try to overanalyze but also it can simply introduce doubt and put pressure on yourself. Of course, this is one of the most natural responses of any trader. In fact, it’s the traders who tell you they’re 100% sure about the outcome of a trade that you should worry about. Put simply, until you get that crystal ball working, you will never know the outcome of any trade. That inability to see the future reduces every trade to a binary outcome. It will either go your way or it won’t. Little wonder then that this is a cause of stress. But this over-focus on the individual trade is what’s holding you back and therein lies the crux of the problem.
The single most important thing to understand when trying to overcome all of these hurdles is how you approach individual trades and forex trading as a craft.
If you are focusing on and sweating over each individual trade, you’re doing it wrong. The only way to trade forex and be successful at it, rather than burn out quickly or fade over time, is to establish a system and a process. When you understand trades as part of a process, rather than as individual events on who’s success everything depends, you will free yourself of many of these fears. Once you begin to see trading as something that takes place over the long term, you will become a better trader. And once you have a system in place that means you are going to be right more often than you’re wrong, that you make more money than you lose, you will cease to rely on individual trades for your sense of wellbeing.
Approach each trade afresh. Free it of any losses that came before and understand it as one of the dozens, if not hundreds, of trades you are going to make over the coming year. Judge your success not on the outcome of individual trades but on sets of trades over a longer timeframe. Of course, there are some simple, practical solutions to certain issues too. If you are suffering from a crippling fear of failure over individual trades, you are likely committing too much to each trade. It might be time to reconsider your position size and work on your money management. If you are so unsure of your analysis you regularly find yourself failing to pull the trigger on trades your system is flagging up, you might need to go back to the drawing board.
Indeed, better than that, take your system for a spin on the testing circuit. Put the work in and power up a trading simulator or your demo account and test your system, your process, your checklists, and your whole approach. The great news is that thanks to technology, you can now do this more easily than ever. Assess how your system performs over a significant period – say a hundred trades. This will not only give you a greater sense of security but will also help you to see trades not as one-off events but as part of a process. A larger set of trades will really show you whether your system is working in a way that a single trade never can. Having substantiated confidence in the system you are working with is an enormously important aspect of trading that can help you overcome the smaller, short-term psychological hiccups.
Finally, once you have fully internalized the fact that trading is a process and have gained confidence in your system, you will be ready to overcome even the most dreaded of events for any trader: a losing streak. Psychologically this can be tricky even for the most experienced of traders. But the plain fact of the matter is that the more you trade the greater the statistical chance that you will encounter, through no fault of your own, a run of bad trades. The most dangerous thing you can do is start to mess with a strategy you have taken a long time to establish on the back of three or four losses. It’s a trap many fall into. The good news is that if you have managed to free yourself from over-focusing on single trades and if you have confidence in your system, you are perfectly placed to be able to see every new trade as a fresh start.