Forex Psychology

Important Questions Every Forex Trader Should Ask Themselves

Becoming a successful forex trader takes a lot of hard work and determination. It’s easy to get so caught up in things that we can miss signs that we should be doing things differently. This can result in bigger problems down the road and cause us to lose money or become stuck in the same rut with zero improvements.

If you’ve already started your forex trading career, you should use our self-evaluation checklist to see if you’re making any common mistakes. Hopefully, this checklist will help to outline problems that you may not realize are hurting you. Ask yourself these questions:

  1. What tone does your inner voice take when you’re trading? Is it angry and frustrated, or relaxed and focused? If someone could hear your thoughts, what would they say to you?
  2. Is your strategy based on solid facts about the market, or do you make loose decisions that are based on thin air? Could your strategy use some improvement?
  3. Do you ever take the time to improve yourself when it comes to forex trading? Do you invest time in learning new things and perhaps practicing on a demo account, or are you stuck in your old ways? 
  4. Do you think your losses could be lowered with better risk-management precautions? Do you ever throw caution to the wind when it comes to risk-management and later regret it?
  5. Once you incur a loss, do multiple losses tend to follow? Could it be that you allow emotion to cloud your judgment when you’re down, or do you fall victim to risky tactics like revenge trading?
  6. Can you recognize when you need to take a break from trading? Have you ever continued to trade while feeling anxious or fearful, only to make bad decisions? Has a stressful life event ever caused you to become distracted while trading, resulting in losses?
  7. What is your general mood when you finish trading? Are you fulfilled and happy, or overwhelmed and stressed? 
  8. Could you possibly be addicted to the rush of trading? Are you often borrowing money from others or using money that is needed for bills and necessities to trade with?
  9. Do you make trades because they are good moves, or because you’re craving the excitement or self-esteem boost that trading can provide?
  10. What are your short-term and long-term goals? Do you think those goals are realistic or far-fetched? 
  11. Are you investing enough time into trading? Are you focusing on trading full-time, or is this just a part-time activity? Are your expectations in tune with the amount of energy you put into trading? 
  12. Do you think you have the right attitude to be a successful forex trader? When you lose, do you beat yourself up or learn from your mistakes?
  13. Do you keep a trading journal? Do you think that your strategy could be improved by taking the extra effort to document your decisions?
  14. Can you find the humor in losing and move on easily, or do you become fixated on everything you lose and allow bad days to overcome you?
  15. How focused are you when you’re trading? Are you in the zone, or are you often distracted by background noise and other thoughts? Would a quieter environment benefit you?

Answering these questions honestly can cause substantial growth in your Forex trading career. Only when one can look inward can true improvement be made.

Forex Psychology

Greed: The Most Dangerous Emotion to Feel While Trading

When just starting out, one of the many warnings that people seem to get is to not be greedy, in fact, a lot of mistakes that are made from both the new and experienced can have an aspect of greed in it, but what exactly is greed?

Greed is basically a “selfish and excessive desire for more of something than is needed” as stated by the Merriam-Webster dictionary. If you think back into your life, I am sure that you will be able to see times where this definition matches your own experiences, in fact, you may have experienced it a large number of times, often it can be a subconscious thing, making decisions without us even knowing, other times it can be an aim, not a good one, but it is still an aim.

Now greed by itself is not necessarily a bad thing, it involves the desire to gain more, to achieve more which is often a good form of motivation, where things go wrong is when this want for more becomes excessive when you do not have a limit to how much you want and so you keep pushing yourself for more and more and it can eventually push you to do things that you would never have done before and that is way outside your strategies boundaries.

So what exactly are the dangers of it? Greed is a very strong emotion that can prompt you to take actions that you would never have otherwise taken when we are looking at trading, this would come in the form of creating additional trades, larger trade sizes than usual or chasing the markets in order to either make more or to win back some of your previous losses. It can cloud your judgment and take you off the path that you have been working on for so long.

So we know what it is, and we know why it is bad, so how do we get over it? How do we suppress that emotion? It can be done, but it will take effort and discipline to do, its not easy, but once done, it will make your trading far safer and far more successful.

The first thing you need to do is take a hit to your ego, you need to have an understanding that you aren’t always right, you have your strategy with its criteria for a reason, if you were always right, you would not need that at all, and you know what? That is a good thing, you won’t always catch the movement of the entire market and you may miss out setups altogether, it is important to recognise that as when it happens, you still need to move on and concentrate on the next trade and not look back in regret.

That is a part of trading, losses and missed trades are as much a part of trading as winning is, looking at your strategy, in the long run, you can make a lot, but greed will tell you to make a lot now and worry about the future tomorrow, not a good tactic if that greedy trade causes you to lose the last months profits. Being able to forget the previous trades and just look forward is a way of preventing yourself from being influenced by our greed and making unnecessary and dangerous trades.

One way that some people prevent greed from coming in is to convince themself that they are more lucky than skilled when it comes to trading, so they do not have the belief that they can just put in trades and win, instead they need to ensure that they follow their strategies and entry criteria in order to trade, something that helps prevent them from making additional unnecessary trades. So ultimately, you need to look to the future, concentrate on your strategy, and avoid those additional trades.

Forex Risk Management

Why Scaling in Might Be a Bad Idea

If you are already in a winning trade, is there anything else you can do to father navigate its course to your benefit? One of the best techniques in position management used by trading professionals, scaling out, is based on the idea that a trader should withdraw part or half of the money at a particular moment in a winning trade, move the stop loss to break-even, and keep the remainder running until the point when either the trailing stop, exit indicator, or stop loss finally closes the trade. However, what would you do if you faced retracements while going long for example and the price changed direction? Would you put more money in although you are already in the middle of a trade? The answers to all of these questions are closely related to another term – scaling in that, in contrast to scaling out, essentially entails adding another position to an already existing trade. The understanding of this topic is what will help safeguard your trades against some common challenges as well as guide you through a running trade.

If a current trade is doing well and approximately a hundred pips later a retracement occurs, is a trader advised to double down? This question is equally applicable to trades that really take off because it essentially involves doubt about whether anyone should take on more risk. Although the trade in this case is a fruitful one, is investing more money a good or a bad idea? The expert opinion generally advises against entering an additional trade after you are officially in another one. Although some traders may disagree, the facts supporting this standpoint are numerous.

Firstly, if you have developed a system, or working towards designing an algorithm, you probably understand how crucial entering a trade at the best possible time is. A trade that exhibits an unstable and unpredictable behavior 20 or so pips down the line is certainly not the one you should ponder. Traders often feel compelled to make irrational decisions because of the fear of missing out (FOMO). Entering a FOMO trade, however, reveals the psychology of traders who take actions based on emotions, rather than trusting the systems they have worked hard to develop. Such emotion-driven trades inevitably lead to numerous and often repetitive losses, which is the exact opposite of what you need to grow a forex trading account.

As we cannot assume which direction the market is going to take and for how long, we strive to create algorithms on which we can rely. Moreover, since we test out each indicator we use, there should be no fear of trusting a system which has proved to give good results more often than not. Even if you notice some mild changes a while after you entered a new trade, simply allow the system that you built to take care of the trade for you. Therefore, there seems little to no reason why anyone should consider adding on. If such a decision revolves around fear or greed, the prospects of getting far in this market are very low. A trade that appears to be bad right from the start will never render any good results and risking more money at this point would seem like a truly reckless decision leading to a gloomy outcome. Furthermore, with the option of choosing between so many currencies, opting for a pair that cannot bring about any positive results also cannot have a logical explanation.

If you are in a winning trade going long, how would you react if you got another signal from your system? Should you trust your confirmation indicator and take action accordingly? A confirmation indicator signaling you to long is actually telling you that it first went the other way. For example, a zero-cross indicator would give out a signal to go long (above zero) only if it crossed the zero line and went below first. Of course, if this happened, why would you stay in such a trade? As this confirmation indicator told you to short, you actually received a signal to exit (see picture examples below). Although this is not the best option you can find, confirmation indicator can definitely serve as an exit indicator as well, and especially if it is giving you a clear sign to exit, it is in your best interest to recognize it and act upon it. Therefore, no matter how successful a particular trade is, following a signal blindly, without proper interpretation, leads to nothing but failure.

Above, we see two long signals suggesting that we add on in the areas above while, in between, we get another short signal.

Consequently, whether you are adding onto a losing or a winning trade, the result is almost always the same. Instead of being impatient and hungry for money and success, strive to create a sustainable system that will safely operate in the back so you can let go of all the stress. As an alternative to trading fueled by emotions, learn how to base your trade on the system you have invested in creating. What is more, learn to interpret and trust your indicators because their purpose is to protect you and get in and out of trades in the most optimal point of time. As opposed to scaling out, which should become part of all traders’ plans, scaling in is an unwise strategy that leads to loss more often than not.

If you want to earn a profit continuously, you should strive to support yourself with tools that can grant you that. The idea of amassing a fortune overnight, though, will impact your trading and ability to learn and prosper. Leveraging up by adding on to a winning trade only equals more risk that will most probably get your account in a position from which you will hardly be able to get out. Not only is it a risky maneuver, but it also appears not to be a very smart one. If you have a goal you want to reach, you will accept time and effort as two preconditions to fulfilling your dreams. As it appears, there is little room, and certainly little hope, for quick solutions and related mentality.