Forex Psychology

Top 10 Forex Trading Psychological Mistakes

It is said that the personal psychological challenge constitutes 90% of the struggle to achieve consistent success as a forex trader. Can it be true? Yes and no. Many great traders who have written about their experiences have recognized how their own inner psychological struggles have caused them heavy losses, even when they “knew” they were doing it wrong. There can be no doubt that the psychological factors are of great importance in the game of Forex or when speculating in any market.

Mastering your negotiating psychology isn’t going to offer you money by itself but, if you’re not aware of the tricks your own head is trying to reproduce, you are very likely to be losing even if you are a good trader and have been successful in your trading decisions. There are hundreds of ways a trader can sabotage himself. There is a “physical” aspect to trading.

We want you to find it useful in your journey as a trader to be aware of the various psychological traps that traders usually fall into. Sometimes you have to experience something for yourself to learn from it: nothing teaches us better than direct experience. We want some of these points to give you a new understanding of the trading errors you have already made or warn you beforehand of mistakes you have not yet made. Make the effort not to blame yourself when you make a mistake while operating: get your “revenge” by learning the lesson and not by making the same mistake.

#1 – Not Believing In Your Methods

It is surprising how many people operate in the markets without being convinced that they can make money or at least make sure that they have a good chance to do so. Even if you think you believe in what you’re doing, are you sure you don’t have big doubts under that surface? The answer to this problem is to prove its methodology. For example, if you follow trends, take time to review much historical data. Does it show profitable results most of the time? It’s based on a solid concept, like a reversion to mean or impulse? If the answer to all these questions is yes, you should be sure of what you are doing and not forget that you believe in it.

#2 – Not Having a Plan and Sticking To It

This sounds very obvious. It’s not just about having a plan, it’s about having several plans and leaving some flexibility. For example, if you are doing day trading, you must have a method to decide in each session which currency pair or pairs to trade. But, if the pair that choose goes nowhere, while another pair shoots up, you may want to reconsider your decision rather than just “stick with the plan”, for example, allowing you the option to modify your opinion hourly. It is a “plan”, but a plan may also include some structured flexibility.

#3 – Not Knowing the Difference Between Planning and Living

It’s pretty easy to make a plan that works on paper, but living that plan in real-time can be something completely different. A good example is to make a plan to do hundreds of trades in a year or so and expect your account to suffer a 20% reduction as it suffers a streak of 20 consecutive trades with losses. You can make the review in a day or two and decide if such losses are acceptable. You will probably feel very different when you spend weeks or even months losing real money over and over while your balance shrinks. There is no optimal answer to this dilemma, just keep in mind that spending months of time in an hour or so is not necessarily a good psychological practice for bad negotiating times.

#4 – Being Afraid Of Placing A Position

These are the opposite sides of the same problem. The best way to overcome this is to tell yourself every day that you are willing to place several positions in one day or none at all, and that what you do will depend entirely on the market situation rather than the condition of your wallet or your mood. There will be days without action and days with lots of action. You have to adapt to the circumstances.

#5 – Making “Agreements” with the Market

Tell yourself that, if the price goes up another 10 pips or if it doesn’t go up in the next hour, you will close the position. This is simply your mind subjected to your anxiety. Ignore it, stand firm, and just step out of positions according to your plan.

#6 – Being Too Anxious To Take Profit

You see a benefit on the table and think how nice it would be to take it and stop operating that day, thus missing what could be a more profitable day. This is laziness and self-indulgence and must be controlled. The only reason to take profit must be that you have a real reason to believe that you will probably not go much further in the desired direction. Let the market point it out, not anticipate it.

#7 – Protecting Yourself From Losses

This is really the same as an appetite for profit. You may need to rethink your risk management strategy.

#8 – Letting Positions With Losses Run

There is a simple way to avoid this: always use a strict stop-loss and do not constantly expand it.

#9 – Not Taking Responsibility for Your Trading

It’s very easy to make excuses. If I hadn’t missed the bus/been distracted/in a bad mood then I would have handled the position better and made money instead of losing it. It’s your duty to make sure that that you do not miss the bus or get distracted or be in a bad mood. Once you take responsibility for your trading activity, your mood can improve as you see that there’s a way to make things better. It’s a marathon, not a sprint.

#10 – Endless Search of the “Holy Grail”

You test and design a strategy that offers an average of 20% profit per year. But wait! Try something else to earn even more, say 25%. Is there anything better out there? Maybe, but this process of searching and testing can take a long time. Consider this: If you spend 6 months testing instead of operating in a committed way to find a way to earn 25% instead of 20%, you will simply lose 10% and it will take you another year to make up for it. Keep searching by all means, but don’t let that affect your trading. Even if you have a pretty solid methodology, it doesn’t have to be perfect!

Forex Psychology

Are You Guilty of Trading Bias?

Biases can have an effect on anything in life, from the food you wat, the places you visit, and when we are looking at Forex, the trades you take, and the reasons behind them. We have looked at some of the more common biases that you find within the Forex trading world.

Confirmation Bias

This is something that you get in any industry, you see it most often on the internet or during an argument where someone will come up with an idea that sounds a little far fetched, they will then look over the internet to find sources of information that match what they have said while looking for evidence is good, it’s not when you skip over 10 different pieces of information that counter yours, just to find the one that confirms it.

The exact same thing can happen in trading, you have done a little bit of your own analysis and come to a conclusion, so you want to confirm it with others, when you look online for it, you will automatically be looking for analysis that is the same, so if you thought something was bearish, you will be looking for bearish information online, even your search may contain that exact word. So you may find an article that matches yours, but the 10 articles around it may state that the market is bullish, ignoring those counter-arguments can cause an increase in losses. Looking for unbiased analysis is the best way to go, although we know it can be quite difficult to find.

Herding Bias

This is often referred to as a Sheep mentality, have you ever found yourself doing something simply because other people are? If a Sheep decides t ogo somewhere, another may follow, then another and another until the entire herd is doing that action or going t that place, that is where the term sheep mentality comes from.

This behaviour can be seen in trading too, if the majority of people are going long, then it is far more likely that the next person to come along will also go long, then the next and then the next. It’s natural to think that if the majority are going one way, they must know something, but this is not the case. You have done your analysis, it all points to a short position, so take that short position, why did you waste all that time just to be persuaded by a group of people, most of which most likely did not actually research anything. Take the trade the way you analysed it, if it’s wrong, then you can learn from that mistake through your journal, but if you go long because everyone else did, you learn nothing as you do not actually know why you took the trade in that direction.

Attribution Bias

This is all about what you feel is responsible for a loss or a win, when we look at trading, when we win, we often congratulate ourselves on a great trade, we analysed things well and it paid off. When it goes wrong, who is to blame? It was what Trump said, it was a freak movement in the markets, it was anything but me that caused it.

It is very natural for humans to want to blame someone or something else for their misfortune, however, it is important to be able to look at something without this bias, being able to determine exactly where the trade went wrong, and what you did wrong is one of the best opportunities that you have agave to learn. Simply putting it down to an uncontrollable outside force does not teach you anything, it does not help you to adapt and it does not help you with becoming a more profitable trader.

Addiction Bias

This one is all based around excitement, the thrill of getting a big win, the idea of getting a big win. Our minds will always want to retain memories of those most exciting trades and the ones that made us the most money. This can often lead to something called an addiction bias, where we want to try and recreate that exciting experience. Having that huge trade in the back of your mind can make you break out of your sensible strategy in order to put on a larger trade to try and recreate that feeling, this is never a good idea, it goes against your risk management and into a territory of trade that is outside of your strategy, making it harder to predict and a lot more dangerous for your account. Use those large trades as a reminder of what you can achieve, but do not try to fast track yourself to that outcome.

Recency Bias

This is about thinking about the most recent thing that has happened and making decisions based on that one event, rather than looking at things as a whole. This can be quite prevalent with news traders, especially now Trump is the president. If there are a number of news events coming up for USD, the overall markets are bullish at the moment, the most analysis points to a bullish movement, the news comes out and it is negative (bearish). What do you do? You put on a sell because the news can move the markets down, but, nothing happens, it continues to rise, why? The reason is that the markets are still bullish, one bit of news won’t change that, you have looked at the most recent event to happen and ignored everything else. You need to maintain a view of the entire picture, not just the most recent even to happen.

So, those are some of the biases that we see both in life and in trading, are you guilty of them? I know I have been, it’s ok to have these biases, what is important is that you are able to identify them, and then work on avoiding them in the future.