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Forex Psychology

Trading Psychology: How to Manage Your Forex Trading Fears

If you’re human, there’s no doubt that you’ve worried or felt anxious about things that affect your everyday life from time to time. This is a completely normal human emotion that often affects forex traders as well. When our hard-earned money is on the line, it can feel impossible to avoid becoming worried about losses or to generally doubt that we’re on the correct side of the market.

Every trader has been there at some point, regardless of how successful they seem to be. After all, we’re all human, and none of us can be a 100% emotionless robot trading machine (wouldn’t that be nice!). Although worrying about these things is normal, it can become overwhelming, especially for those that are prone to over-worrying in general. This is why it’s important to learn to manage your anxiety and to find ways to use it to your advantage so that you can avoid the negative consequences that come with it. After all, that’s why we’re here. 

The Reason Why Fear is a Problem for Traders

Every forex trader makes the decision to open a trading account on their own, yet the fear of trading is one of the most common trading-related problems out there. So, what gives? 

Consider someone that is getting pulled over for speeding. Initially, they might have been enjoying the breeze, in a hurry, or they may have assumed that they wouldn’t get caught. Yet, the sinking feeling sets in as soon as they see the blue lights behind them…then they start thinking of the headache to come with speeding tickets, court, or whatever consequences are coming. This is similar to how it works with traders. They feel excited and aren’t as worried in the beginning, but the consequences and potential losses that can affect them once they’ve opened their trading account suddenly come into play once everything becomes real. 

When fear manifests itself in forex trading, it can cause us to make mistakes like pulling out of a trade too early. For example, a trader might do everything right and set up a trade based on solid analysis and facts, then they hear an unfounded rumor, and rush to exit the position. In the end, the rumor never comes true and the trader could have simply stayed in the profitable trade. This isn’t just a one-time occurrence – many traders find themselves in a never-ending cycle of making bad trading choices because they allow themselves to become overly anxious. Another way that anxiety can manifest itself is by keeping traders from entering positions altogether. Obviously, if you never enter a trade, you’ll never make any money, while you’ll walk away with less money if you exit trades too early. 

How to Overcome Your Trading Fears

The good news about fear is that a healthy dose of it can be helpful to traders in the right context. It’s important to consider rumors you hear, to be prepared in case things do move against you, and to pay attention to news events in case things go sour. If you jump into the market with too much confidence and you don’t pay attention to these things, you’ll be worse off than you would have been if you were too careful. It’s important to find a balance here so that you can make the best decisions.

One of the best things you can do is to figure out what it is you’re really afraid of. For example:

  • If you’re afraid to lose money, you could take steps like limiting the leverage you use and using strict risk-management precautions, such as setting a stop loss on every trade. If you know that you won’t lose much money if things do move against you, you’ll feel less anxious and will be less likely to rush to exit the trade over rumors or self-doubt.
  • If you’re afraid to lose profits on an active winning trade, you could make sure that you’ll walk away with something by breaking even or taking part of your profits once the market moves in your favor.

Whatever your fears may be, you can take steps like the ones above to help take some of the worries off your shoulders. Even though it is human nature to feel anxious when you aren’t sure of the outcome, keeping a positive mindset, trusting your trading plan, and taking important steps to overcome your trading fears are some of the most basic steps you can take to overcome trading psychology. We’re all prone to being fearful of certain things in life, but it is important to learn to keep your emotions in check while you’re trading so that they don’t wreak havoc on your profits.

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Forex Psychology

Trading Psychology 101: A Complete Guide to Self-Actualization and Prosperity

When we start learning about trading, topics such as consistency and rules make it the last on our list, especially because, with the pace and the stress of everyday life, we make a profit our priority. However, if we are already eager to get to that financial freedom, there are specific points that we cannot turn a blind eye to and simply ignore. Experts in this field share how now, after several decades of trading, they have long stopped reading about trading itself. However, what they are still vigorously passionate about because of the benefits it brings is learning about trading psychology and about themselves.

Naturally, there is always room for improvement in terms of trading-specific knowledge, yet once you feel that you have covered enough to serve you consistently, it is time to truly focus on your actions and behavior. Today, we are going through this comprehensive list of lessons and tips which you can use as a guide to achieving self-actualization and prosperity.

Traders often see more benefits from short-term activities than what they can actually reap in real trading while heavily doubting the potential their actions can unlock over the long haul.

Lesson 1

At the beginning of a trading career, many traders are quick to assume that they can realize all of their potentials and surpass others faster than what is realistically possible. At the same time, beginners frequently miscalculate their steps and undervalue what they can produce in the long run. What this essentially means is that traders typically have a desired sum of money they wish to win in the shortest amount of time, but as it often turns out, this amount is usually equal to the overestimation of their skills and abilities at that particular stage of trading development as well as the underestimation of the success they can actualize from a long-term perspective.

Many professional traders have admitted to having had the same approach to trading at the very start, without realizing what this type of he/she wishes to attain and, for some people, this may be a dream house or a dream car, while for someone else the goal may have to do with overall financial stability that would secure a household. Especially for those with more pressing issues, everyday needs and challenges (e.g. raising children), or a strong vision of what their future should look like, the urge to reach a financial goal might make the idea of becoming a successful trader overnight that much more inviting.

What experts in this field always tend to stress over and over again is the perspective which most newbies seem to lack – if young traders could only take a step back and commit to a slower pace, they would be able to obtain increasingly greater freedom and finances. Therefore, instead of missing sleep over the initial $2000 a trader longs to earn, he/she would rather adopt a different mentality and take one step at a time to get to much more lucrative endeavors that would bring about sustainable capital just five or so years later. 

Growing as a trader is a process, not a matter of learning a few tricks.

Lesson 2

While traders are constantly surrounded and bombarded with dos and don’ts in every way possible, they also need to understand that the path to becoming a self-actualized and independent trader is also a developmental process. The same path of discovery can be found in different fields of work, so actors need not be able to play out all characters until they discover a sense of inner strength and control just because they read the plot or took acting classes before. Any form of brilliance is like a jewel whose outer layers need to be stripped off until it gets its form and shine to be of any use or to be sold.

Many successful professional traders have shared their own limitations and challenges in trading: some dealt with the excessive need to overtrade, some struggled with fearing the risk which often stopped them from entering good trades and making more money as a result, and some others found taking a loss too difficult so they felt compelled to immediately enter a new trade. It is important to understand that every trader has some part of the personality that demands more attention and that is likely to have a negative impact on trading if left unnoticed and unattended.

At the same time, no development can take place unless we are eager to look within and face our inner demons because without acceptance there can be no recovery and growth. It is in human nature to need to look and feel impervious, complete, and untainted and traders can find solace in the fact that this is a shared trait across all individuals regardless of their age, background, education, or else. 

The first step to growth as a trader is to acknowledge and accept one’s flaws.

Lesson 3

In order for any trader to be able to get over the hurdles caused by their own minds and emotions, he/she first needs to satisfy the number one condition and admit to being imperfect. If you are ready to recognize that you are, in this present form, less than what you need to be capable of producing the results you are hoping to obtain, you will also be able to accept yourself and leave space for improvement. Many traders are already aware of the mistakes they are making because they often stem from some unhealed parts of our minds or souls. If you are already able to notice that you feel tension building up in your body before you take some step (e.g. click the button to rush into another trade after a recent failure), you must also know that whatever action you are preparing yourself to take is not coming from a place of stability and control. However, many traders are also quite attentive and they already recognize these patterns that they feel obliged to repeat time and time again, so they feel tremendous guilt and shame for not being able to put an end to such behavior.

It is in the moment of realization that they will never be able to stop this continuous agony that helped some professional traders to discover a renewed sense of strength. Only once they gained this understanding of their inability did it become plausible for them to overcome such a tremendous challenge. Traders often keep putting more and more pressure onto themselves after they finally see traces and consequences of self-sabotaging behavior, but it is not through erasing or ignoring a specific behavior that leads to strength but through learning how to trade effortlessly in spite of it.

Trading will help you not only allow you to see the person you are but also help you build your character with time.

Lesson 4

The moment any true development is activated is after we acknowledge that we are “damaged” and accept the need to put the effort into finding a resolution to the existing problem. The gap between seeing the fault within ourselves and showing the willingness to do something about it is so vast that it is one of the key determiners of how successful a trader you can become. It is precisely this quality that will distinguish between high-achieving traders and the impulsive ones with an expiry date on their trading careers. Now that you have become aware of the triggers and situations which keep you in this perpetual loop, you are allowing yourself to get a different and more objective perspective where various creative solutions and ideas can emerge. You are growing tactics and methods that will put you out of that vicious circle, so you are no longer in need of exposing yourself to the things that used to trigger you before.

As trading is not exempt from everyday ailments and since it mimics life in all of its forms due to the shared human factor, it is easy to draw connections with some other real-life situations. We can see how some major life adjustments are carried out in the exact same manner, and any addict in recovery would also need to think of strategies to avoid provocations on a daily basis. Here we can prove to ourselves how despite the conscious assessment and recognition of our emotions, shady traits, and situations that may enable undesired behaviors and bring up more pressure and dissatisfaction, we can find peace through acceptance and focused action. When you are able to fully feel all the emotions that may range from exciting and positive to gloomy and scary and still keep moving towards your goals, you know that you have reached a new level of competency that will prevent all those hours of learning about technical tools and testing the algorithm from going to waste.  

Four key trading psychology terms we need to keep in mind are recognition, acceptance, investigation, and competency.  

Lesson 5

This journey is not easy, yet it is an exceptionally rewarding one in the sense of ensuring lasting changes that you will get to witness in different areas of your life. The entire introspection that you put yourself through will inevitably transfer onto your trades and your personal life as well because you will experience a renewed sense of self-confidence and self-reliance. Once you make a decision and commit to leaving no stone unturned until you see the causes of your actions, you will discover deep satisfaction and serenity that, looking back, you will know you have done the right thing. The fact that the best traders in the market keep bringing up the same topics, insisting on traders learning about trading psychology, is an indication that looking within is the only certain way to get to the top.

Even famous psychology book writers and scientists admit to there being two parts of us – one that makes an inherent part of our existence or what we call our nature and another that consists of the lessons and experiences we drew from our surroundings. Some people are, for example, born risk-takers and this is in the innate characteristic that can be further shaped or molded by the environment. Someone who was born in a family where financial literacy was openly discussed and stimulated will probably enjoy a massive head start in comparison to other trading beginners in the market. The keel will never be even and everyone will have their own share of deeply rooted beliefs that are blocking their progression towards expert-level trading. Especially since we cannot always be consciously aware of our subconscious beliefs, it is important to willfully try and test our assumptions about who we are and what we believe in. What you may discover is the realization that some ideas you firmly cling to have never truly served your best interest or helped lead to the results you are aspiring to achieve. And, of course, once we obtain new knowledge about ourselves, we can then take appropriate measures and become one or several steps closer to that ideal version of our future selves. 

Challenge your belief system regardless of where these teachings came from (family, school, etc.) because you may find out that the ideas you embraced so freely never served your highest purpose.

Lesson 6

Psychology tests are becoming increasingly available and resourceful, allowing for easy access and use to analyze how individual personality traits may affect one’s trading style overall. These evaluations typically assess the following four main areas: energy, mind, emotions, and perception. The analysis of one’s energy provides insight into how energy is generated and where it is directed. It reveals whether energy is focused inwards, which is characteristic of introverts, or if it is projected outwards, which we mainly find in extroverted personality types. Those traders who fall into the second group are, for example, much more likely to overtrade because extroversion is heavily drawn to a plethora of stimuli, activities, and achievement.

Having an introverted personality type, however, opens doors to some other patterns of behavior, which can prove to be equally detrimental to trading. The second level of analysis that covers the mind allows us to understand how we see the world and whether we are a more intuitive or a more observant type of person. Here we may find that we are not as detail-oriented as we might have initially assumed, and this knowledge of how we process information can prove to be of great benefit to all aspects of trading. It can reveal its potential in the process of creating your own trading system, which needs to match your own personality for it to be able to produce results. This is another reason why so many expert traders keep saying how some trading systems, despite their creators being extremely successful and affluent, never worked for them. The next point of assessment includes the analysis of one’s emotions, or the opposition between thinking and feeling, that determine our entire decision-making process.

Many professional traders always stress how important it is to acknowledge how you feel in some key points in trading to put an end to behaviors that sabotage your trades. The analysis of one’s perception is also extremely useful because it demonstrates whether traders make decisions based on perception or judgment, leaving room for a more advanced comprehension of their approach to work. And, it is now abundantly clear that one’s entire approach to trading reflects his/her unique set of values, thoughts, ideas, and emotions and these tests can truly help traders get to the core of who they are in order for them to interpret these results and use them intentionally to their benefit. 

Psychological tests do not only allow traders to learn about who they are but they also provide insight into how those traits might affect trading as a whole. 

Lesson 7

The study of epigenetics has shown how we all fall under the effect of different events that permanently influence our genetic makeup. It also proves how experiences that we have leave marks in our neurology, forever changing who we are. As human beings, there are many different causes of such epigenetic alterations as our nature is in constant interaction with our environment. Our experiences in time and place and our relations with other people inevitably impact how we think, what we believe, and how we feel. For example, all traders who have traded before now have this concept and experience of trading stored in their belief system, having thus become a part of who they are regardless of individual success. The events we experienced as children also created pathways for certain triggers to produce specific emotions as if we were trained to respond in a certain manner in similar situations.

Our biology is an equally strong determinant of how these external factors shape us, so someone who is a highly sensitive person may be more reactive to the surrounding stimuli than someone with a different biology. The brain is a powerful tool that stores information, and this process is likely to set off some reaction. The more these connections between a specific context or a situation and a responding emotion are made, the deeper the pattern becomes. That is how one day we may realize we are constantly rushing into trades without knowing the reason behind such behavior. And, while we cannot surgically cut through the lenses of our own neuroscience, we can find peace understanding that our responses seem to be out of control because they are not a conscious choice we choose to make, but a well-preserved bodily function.

Many responses to the external stimuli are of chemical nature, resulting in specific emotions that always provoke similar reactions. 

Lesson 8

In a Harvard study, carried out to assess altruism and fairness, the so-called Ultimatum Game was used to uncover different personality traits that take part in decision-making processes. The experiment paired two individuals, “the Proposer” who was tasked with making an offer and “the Receiver” whose role was to respond to the proposal. The players were given the sum of $100 which they were supposed to split after the Proposer decided on the amount willing to share with the other party. If both players agreed, each participant would receive the agreed amounts. However, if the Receiver refused to proceed, neither this person nor the other individual would earn any profit. During the entire process, both participants’ brains were monitored through an MRI to detect brain activity. The study has shown how, whenever the Proposer assessed how much money was to be gained, the prefrontal cortex was always activated. This particular region in the brain is responsible for various cognitive processes such as planning, decision-making, self-awareness, and problem-solving, among others, and is demonstrative of rational thinking. At the same time, whenever the Responder deemed the offer fair, the same part of the brain would lit up. While the Respondents consented with the offers they considered fair in most cases (close to 100%), the ones they believed to be unfair were rejected in approximately 50% of situations.

What is particularly interesting is that, in such cases, the MRI showed activity in a different part of the brain which governs emotional feelings such as fear or anxiety. This conclusion is extremely important because it proves how, despite the assumption that we are always coming from the place of clear, logical thinking, our decision-making processes are not necessarily always representative of rational thinking. The fact that another brain region activates when we make decisions proves how some of the decisions we make do not come from the right parts of the brain responsible for rational decision-making. Moreover, the study further suggests how in some situations people are utterly incapable of using the prefrontal cortex when they find themselves in a losing position, which should help traders understand why some of their reactions lead to losses. 

Even though we assume to be rational, studies have shown how some decisions are made in the part of the brain responsible for fear and anxiety.  

Lesson 9

Various other studies proved how different emotions activate different regions in the brain, which undeniably affects the decision-making processes. A study of hunger carried out at Ben-Gurion University of the Negev, Israel, researched judges and analyzed more than 1,000 parole decisions made across a period of 10 months. The judges who took part in the study had vast judiciary experience of 25 years on average, which also meant that they had attended numerous Parole Board hearings up to that point. What is interesting is that time of the day emerged as a crucial factor in determining the outcome of a hearing, and hunger directly proved to have a direct impact on the decisions made in the courtroom. The study has revealed how the best time of the day to go before the judge was between 9 and 11 in the morning, indicating a 25% higher chance of seeing a positive outcome. Nevertheless, the next time slot, between 11 and 12, turned out to be the least favorable period in a day, while the window of increased opportunity would only return after lunch. Another drop in parole rates was recorded after 3 PM, lasting until the next rise at 5 PM. These causal associations demonstrated in the above-mentioned study can also be found in the world of trading, where we need to use our systems to trade.

Things that happen inside the human body with all the processes and the connections that are established throughout our lives may have more to do with the sequential, repetitive decisions that we make without understanding why. Sometimes to quiet down their minds and get into a state of complete focus, some traders like to practice meditation which allows them to reach a state of complete centeredness. By doing so, traders quiet down their minds and emotions, thus heavily decreasing the potential of stress residue or any hidden emotional pile-up to affect the trading. Meditation is, however, only one type of activity that leads to improved physical, psychological, and of course physiological state, and traders should explore different pursuits and/or routines that would provide them with the peace and quiet their minds and bodies need before and during trading. 

If hunger can affect the decision-making in judges with over 25 years of experience, imagine what occurs in your body that you have no control over. Find an activity that can help you feel centered and relaxed before you start trading.

Lesson 10

The knowledge of the human body and mind we accumulate with time might make us feel that people are doomed in terms of the ability to fight against our own nature. However, it is only with this knowledge that we can willfully leave more room for acceptance. As more information is gathered, traders need to increasingly invest in exploring their own actions and which steps they choose to take at a particular moment in time. Often people fall for the same trap now commonly known as the Dunning–Kruger effect that makes them view their cognitive abilities as greater than what they actually are, which is the most vivid in those with the least amount of knowledge. Many traders feel exceptionally confident immediately after going through several books on trading, yet when they get immersed and explore the topic more thoroughly, they start to realize that trading is harder than what they had ever expected before. At this point, some traders decide to quit, whereas others choose to devote more time and effort into becoming more knowledgeable about this field. As the curve keeps rising, so does the understanding of the subject, with traders finally reaching a higher level of competency. The rationale of the chart below is to let traders know that if they continue to put energy and keep going further, they will inevitably accrue knowledge and experience and reach the level of expertise they need to be successful at trading. 

People are prone to having a cognitive bias in which the ones with low ability at a task overestimate their ability (see Dunning–Kruger effect). 

Lesson 11

The discoveries made in the field of homeostasis (or what we know as the Yerkes—Dodson law) indicate a connection between pressure and performance. This relationship is increasingly important for extroverted individuals who are usually fond of stress and a busy schedule. The ones who feel motivated by having a variety of tasks to complete may also feel less motivated if the quantity of stimuli is low. What these individuals perceive as a lack of challenge makes them put less effort as a consequence. On the other end of the spectrum, when the quantity of stimuli goes beyond a certain range, the levels of cortisol and some other hormones become increasingly high, thus affecting the natural homeostasis in the human body. At this point, these people may show signs of stress, anxiety, and impaired decision-making. The chart below also exhibits the mid-point where people at the peak of performance are found. The area in between the extremes exhibits the perfect homeostasis or the flow where we can find individuals who are sufficiently motivated and who may, at the same time, struggle if presented with a lighter workload. When transferred to trading, we may find direct implications of this study in the manner traders approach their trades, and it is becoming increasingly important to recognize these patterns our personality types bring into trading.  

The knowledge of how you work under pressure may tell you where your mistakes in trading are (see Yerkes—Dodson law).

Lesson 12

When you read about all the potential dangers of the human mind, the first thing you should not do is not fear yourself. Rather strive to be mindful before you sit to trade, enter that stage of homeostasis and flow through willful effort. Consider topics such as routine and steps to prepare yourself for whatever your next trade is going to bring along. It is vital that you think about the ways you can give yourself much room for allowing for good opportunities to occur, so clearing your mind should be made a priority. Here, at this stage of inner peace, you can actually go over the points where you have not acted in your best interest in the past without judgment. By facing the past challenges with a calm and open mind, you can come up with strategies to avoid any future repetition. All of these activities are there to support you and give you the strength to bring out your best qualities and potential. Without going deep, traders are not fully embracing who they are and are, thus, limiting themselves to a version of themselves that is simply “less than.” Trading skills are not a pill that we can just take to one day to reach success out of the blue. In the same way, we cannot see people as inherently, right from the start, good or bad traders, yet they have grown to become the best possible traders with time and with hard work.

Traders are not born but developed.

Lesson 13

As we can see from the information presented above, investing in learning general trading knowledge alone is simply insufficient and the sole focus on key trading terms can actually shift your perspective away from your real potential. This, naturally, does not imply that looking into charts and understanding the vast trading terminology is a negative approach but it does point to the need to pair it with the conscious effort to discover oneself. There is no fear or weakness in looking within because if you have already failed in the past, the results are there to remind you of the uneasiness of losing money and taking losses. Cut the strings of painful events and recognize your weak points. We cannot escape who we are, but we can endure the act of self-scrutiny if we know that the end result is going to be a positive one. When something hurts, the only way we can put an end to the continuation and the reverberation of its impact is through understanding why something happened in the first place. If something can serve as a lesson, it never truly was a mistake but an opportunity for growth. The purpose of any loss is to help us step into the individuals we feel proud of, helping us develop both as people and as traders.

If something helps us learn, we cannot call it a mistake.

Lesson 14

If you feel convinced now that introspection and inner work is the only real path to self-actualization and prosperity, you can follow the steps we are going to share with you here. Firstly, start off with identification and acceptance of your weaknesses, nurturing an understanding that we all have our own pile of dirt to tackle. Avoidance is not an option if you are serious about who you want to become, and it is also one of the easiest ways to fail as a trader. Secondly, devote time to the planning of how you will avoid repeating the mistakes of the past. Nevertheless, be mindful of the fact that jotting down a plan alone is not going to do the work. What all traders need is discipline that will create a completely new routine through the repetition of healthy strategies and techniques.

If you find discipline to be stressful, find comfort in knowing that numerous experts revealed how such a structure actually allowed them to feel liberated. Knowing what you need to do can put a lot of pressure off your chest and allow you to take up other creative endeavors in life too. Next, you do not need to fight your nature but embrace it in its full form. Learn to trade in spite of your shortcoming and, by all means, do not let yourself remain obsessed with your losses, letting the guilt and shame reside somewhere inside you. Instead, understand that your traits cannot be erased but can be guided and transmuted so as to serve you. Do not fall for the lie that you are ever going to be perfect because you will soon be in a fast lane going back to where you started. Keep reminding yourself of your weak points and maintain vigilance over your own risky behaviors through practicing discipline and consistency.

Discipline equals liberation.

Lesson 15

One of the last notes to remember is that the essence of success in trading lies in the combination of various key aspects which we all refer to as competence. Composed of experience, knowledge, skill, behavior, performance, and goal, competence is indeed both complex and layered. It is no wonder then that some believe how traders need 10,000 hours, or five years with a 40-hour week routine, to become experts. This, however, should not make you want to give up but the opposite because the benefits that you will grant yourself are immense and immeasurable. Aside from seeing the financial reward, you will get to learn about yourself in a way that you would hardly ever be able to. You will learn how to be successful and how to enjoy that success in every respect, applying it to all areas of your life. Now that you are fully equipped with all the knowledge, go ahead and start digging. It is worth it.

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Forex Psychology

Keeping Your Confidence Level Up During A Slump

There will be times during your trading career when you go through a trading slump, it is inevitable and will happen to every single person who has been trading for a longer period of time. These slumps occur when the market conditions change into a scenario where you are not as comfortable with it, your strategy is not as effective in these conditions and so you make more losses than usual. Again, everyone will go through this, multiple times during their career, so it is nothing to really worry about, although we do anyway.

You often hear stories where people have had tense of profitable months in a row, even years without a losing month, then things start to change, the markets shift and that person will struggle to put more than a single winning month in a row together. This happens and it will happen to you. It can be really disheartening, stressful and this makes it incredibly easy to start blaming yourself for it, to blame yourself for what is going wrong and this makes it very easy to simply overlook the things that you are doing really well. That is simply part of human nature, to concentrate on the bed.

The problem with this sort of attitude and outlook is that it will simply make things worse. When you are performing badly at something, and someone tells you how badly you are doing, what is your reaction? For many it is to simply shrink down inside themselves and to just try and get through it without putting in much more effort, for some, they completely give up and walk away. This is what your own mind will be doing to you when you are going through one of these slums. The negative thoughts and emotions will flood in, concentrating on what is going wrong will only cement these thoughts into your mind.

This is why you need to be able to focus your mind on the positives, things were fantastic before and so they will be again, you are clearly doing things right so we need to look at that. It can be very hard to keep your confidence levels up during a slump, but we have come up with some ideas that could potentially help you to remain a little more confident during one of these slumps. They may not work for everyone, but it is certainly worth knowing that they are there to try, as you never know which one will work for you, so let’s take a look at what some of the things that you can do are.

Don’t Dwell, Act!

When you are in one of these little slumps, it is easy to simply sit there thinking about the negatives and everything that is going wrong, this is natural. You need to think about how this will help you, the short answer is that it will not. Sitting there and just thinking about the bad will only make your confidence drop even more, or even make you want to give up and quit completely. What you need to do is to take action. You should have a trading journal, use that to find out what is going wrong, and then do something about it. If you do not try and change whatever it is that is going wrong, then you will find it very hard to get out of this slump any time soon. So do not simply sit there thinking, act on it, get rid of the bad habits, and whatever else could potentially be causing the slump that you are in.

Look at What Went Well

It is important that you are able to shift your focus every now and then, shift it to look at what has been going well. This is easier said than done but it is vital to getting out of that slump that you are in. You will have had some trades that worked, take a closer look at them to see why they worked well, parts of your strategy will still be valid and so should still be used. Remember that you were able to be successful in the past, so you will be able to be again, this can help to give you a little boat to your confidence levels. So remember to think of the positives, not just the negatives when you are in this sort of situation.

Change Strategies

Sometimes these slumps are no fault of your own if your strategy works in specific conditions but the markets have now moved away from those conditions, of course, it is going to struggle to remain profitable. This is where you need to step in, it is always good practice to have a good understanding of a number of different strategies, they can then be used during different market conditions. So once a single strategy stops being effective, you can simply switch over to a more appropriate strategy without having to go into a slump at all. There will still be performance slumps, but being able to switch over should make it far easier to be able to get out of it, or to at least limit the damage of it. So if you only know one strategy, get learning another one or two.

Find a Niche

A niche is basically a specialisation, it is where you focus your trading on a single or specific aspect of it. This can help to make you an expert at a certain style of trading and helps to avoid the mismatch or blur of different strategies and ideas. You need to get an understanding of what it is that you are good at and then use that as the trademark of your trading, to have that at the centre of your strategy. Once you have it, stick with it, work with it and you may find your trading to be a little more enjoyable, even during a slump.

Talk to Others

When you are going through a slump, it is more likely that someone else will be too. Being part of a trading community will allow you to communicate with others, to get an idea of how others are doing too. It may sound bad, but knowing that others are having a difficult time too can help to build your own confidence as you know that you are not alone in your experience. You can then also use these people to generate ideas of how you can get out of this situation. Find out what they have done in the past to get through it, work out if you can do similar things to them, or make adjustments to take their ideas into account. Do not let it change your style completely, you need to remain true to your overall strategy, but there is no harm in getting ideas from others. It is also a good way to vent your frustrations.

So those are some of the things that you can do to hopefully keep your confidence during a slump. It is never a good situation to be in, people have lost a lot of money in them or even quit trading completely. Try to stick with it, look for your positives and there is absolutely no reason why you cannot get out of a slump, it may take a while, but you will get through it so keep your head up and keep on trading.

Categories
Forex Course

51. Fundamentals Of Candlestick Patterns

Introduction

In the previous course lessons, we have discussed the basics of candlesticks along with the pros and cons of using them. From this lesson, we will learn the basic candlestick patterns and their usage. As discussed, the idea of candlesticks charts has started in Japan in the late 1870s. These charts were then introduced to the outside world by Steve Nison through his first book, ‘Japanese Candlestick Charting Technique.’

In this lesson, let’s discuss the primary advantage of using candlestick charts. Although a single candlestick gives us many details about the price movement of an asset, a sequential set of candlesticks is more powerful. These sets are also known as patterns in simple trading language, and using these patterns, traders across the world take trading decisions.

Expert traders have decoded many such patterns and rigorously backtested them to analyze what those patterns will eventually result in. They also examined how the market direction will change after the appearance of these patterns on the charts. Now, let’s see the different candlestick patterns one must know.

Different types of candlestick patterns

There are single, dual, and triple candlestick patterns depending on how many candlesticks are involved in them. For example, if there are the candlestick pattern is formed by three candlesticks, it is known as the triple candlestick pattern. Every single pattern has its own significance and can be found in most of the Forex charts.

The main intention of identifying any candlestick pattern is to understand the further price movement in the market. Hence these patterns are classified into two different types – Continuation Patterns & Reversal Patterns. When we identify a continuation candlestick pattern on the chart, it means that the market will continue in the same direction as the underlying trend. Contrarily, if we identify a reversal pattern on the charts, we can expect the price to change its direction. Also, these patterns are internally classified as bullish and bearish continuous/reversal patterns, which will be discussed in the upcoming lessons.

Examples of Continuation Candlestick Patterns

  • Deliberation Pattern
  • Concealing Baby Swallow Pattern
  • Rising Three Methods Pattern
  • Separating Lines Pattern
  • Doji Star Pattern

Examples of Reversal Candlestick Patterns  

Some of these are single candlestick patterns, while some are multiple candlestick patterns. We shall be discussing each of these patterns in detail in our future articles.

Psychological context of candlestick patterns

The candlestick patterns demonstrate the psychological trading that takes place during the period represented by a single or multiple candles. We need to start imagining the price movement as a battle between buyers and sellers. Typically, Buyers expect that prices will increase and drive the price up through their trades. Whereas sellers bet on falling prices and push the price down with their selling interest.

Also, the Japanese gave very visual names to these patterns so that it impacts the mentality of a trader. For instance, pattern names like Hanging Man and Dark Cloud Cover represent negativity, while the patterns like Three White Soldiers and Morning Star indicate positive market results. Hence, as soon as we hear the names of these patterns, our sub-conscious memory will know whether the forecast of the market is positive or negative.

Benefits of trading candlestick patterns

Although initially conceived for daily timeframes, Candlestick patterns can be used by swing traders, day traders, and even long term investors. Below are some of the significant advantages of these patterns.

  • They are very easy to identify and comprehend. They provide a detailed description of the occurrences and happenings in the markets.
  • Interaction between the buyers and sellers can easily be understood just by reading the pattern and without having to analyze the market entirely.
  • Candlestick patterns can be used in conjunction with other indicators for extra confirmation on the trading signals generated.
  • They display reversal patterns that cannot be seen in other charts like Line & Bar charts.

That’s about the introduction to Candlestick patterns. In our upcoming lessons, we will discuss different candlestick patterns and how to generate trading signals using these patterns. So, stay tuned.

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Forex Course

46. Analyzing the Forex Market: Sentimental Analysis

Introduction

Have you come across the saying that 95% of the traders lose money in Forex, and only a handful of 5% succeed? As a matter of fact, this statement is entirely true. Though trading in the Forex market is no different from doing business in the real market, most of the Forex traders find it challenging to succeed in trading. This is because, in the real world business, there is hardly any relation between business and emotions, whereas, the Forex market is closely related to human psychology.

Many traders trade based only on fundamental analysis or technical analysis and ignore the existence of the sentiment involved in trading. This is the reason we have the concept of 95% and 5%.

Why is there sentiment entailed in trading?

To answer this particular question, we’ll have to understand the core basics of trading.

Firstly, what is trading? Trading, according to the textbooks, is the process of buying and selling of products. Or in simple terms, it is the process where a seller sells his products to a buyer, or a buyer buys products from a seller.

Now, the point one must note here is that to buy or sell a product, both parties (buyer and seller) are obligatory. Without a buyer, the existence of a seller is useless, and without a seller, the presence of a buyer is pointless.

And this above concept is the answer to the above question. Let us understand how.

There is an end number of traders trading the Forex market. The logic for buying and selling is the same as the real-world market. That is, a trade cannot be completed without the presence of both parties. For example, if you want to buy a currency pair, then you mandatorily need a seller to sell it to you. And if there are no sellers in the market to sell it at your desired price, then your buy order will remain pending (incomplete).

Broadly speaking, traders can be segregated into two types. The first set of traders includes large banks, hedge funds, mutual funds, and big-time investors who move the market. And the second set comprises small retail traders who do not have the capability (enough capital) to drive the market.

How do big players always win?

Big players are the ones who always win in the market. And they make this possible by bringing in emotions in trading. Let us understand this with an example.

Let’s say a currency pair is in an uptrend from a month. At this point in time, what do you think the whole world is thinking? As obvious as it gets, most retail traders are looking at it as a buy. Now, since everyone (big players and retail traders) are looking to buy, there is no seller to sell it to them. This situation, in turn, creates loads of pending orders in the market. So, the masterminds (big players) start to become the sellers in the market to the retail buyers. And this continuous selling by the big players causes the market to drop pretty drastically.

Seeing this drastic fall in the market, all retail traders who were buying get stopped out, and the rest begin to look it as a sell. And once the retail traders start to sell, the big players buy it from these sellers (retail traders). Hence, from this, the market again starts to head north. This is how big players bring in emotion in the minds of the public, manipulate them in the market.

Finally, we can conclude by saying psychology plays a major rule when it comes to trading in the Forex market. And the sentimental analysis is all about learning more about psychological trading. So in our further lessons, we will be discussing a lot more on these topics.

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Categories
Forex Basic Strategies Forex Trading Strategies

Trading False Breakouts Like a Professional Forex Trader

Introduction

Often there are times in the market when the price breaks a certain significant level, and most of the novice traders immediately jump into the market. But, suddenly, the price reverts quickly, stopping out these traders or putting them in a losing position. Most of the experienced traders would have exited their positions when they realized they are trapped by the big whales like industry or institutional traders.

But beginner traders often become the victims of these false breakouts, and it affects their psychology as well. They will start doubting their trading strategies, and the fear element will surpass their confidence. Instead of falling into the negative state of mind, traders should learn how to use these false breakouts to their advantage so that they can profit from it. In this article, let’s discuss how to trade the false breakouts properly.

Most of the traders often consider false breakouts as a negative thing in the market. The general perception is that, by trading the false breakouts, they are taking the unnecessary risk, or it is not the correct way to trade. Some traders also believe that simple breakouts are more comfortable to trade. It is true, but simple breakouts won’t provide a great risk-reward, and also, it is not a consistent way to trade the market. On the other hand, successful & experienced traders see the false breakout logically and consider it as an opportunity to make some quick profits.

There are a lot of ways to trade false breakouts. Some traders trade them in conjunction with indicators, and some use it with trend lines and support resistance. In this strategy, we will show you the most appropriate way of trading false breakouts.

Trading the false breakout by using the major S&R levels

False breakouts occur in all types of markets, such as Forex, Stocks, Futures, and Options. They also occur in all kinds of market conditions. But the critical thing to remember is that every false break out is not worthy enough to trade. Always consider trading the false breakouts by following the trend of the market. That is, if the trend is up, look for the buy-side false breakout and in a downtrend, look for sell-side false breakouts.

Step 1 – Find the trend of the higher timeframe

This step is simple yet crucial because we need to confirm the trend of the market. Keep in mind that most of the lower timeframes always follow the direction of the higher timeframe. To explain this strategy, we are examining the uptrend of the GBP/USD forex pair.

Step 2 – Look for the significant S&R in the lower timeframe

Most of the false breakouts occur near the support and resistance level. The reason brokers and market movers use these levels is to manipulate the market as is these areas act as a significant supply-demand zone. This makes it easier for the bigger players to fill more orders.

Step 3 – Look for the false breakouts at the S&R level

As we know by now, most of the false breakouts happen at major support resistance area. A trader can set the alarm on the price chart to see when the price action is at a major level. When the price breaks these levels, wait for the false breakout to trade the market.

In the below image, GBP/USD was in an uptrend. On 15 Min chart during the pullback phase, prices started holding at the support area. On 29th Nov, look at the first circle where the price action prints the false breakout. But there is no way to trade that breakout. Because after that, the price action dipped below the support area, which is a sign of a false breakout. So it is an indication to go long on the GBP/USD forex pair.

Step 4 – Entry, Stop loss and Take profit

A trader should be entering the market when the price action holds at the significant support resistance area as it confirms that the levels are active to hold the prices. \

Take profit placement depends on your trading style. If you are an intraday trader, we suggest you close your position at a recent high. If you are a swing trader, look for another false breakout to load more positions. You can also use the recent high or any support resistance area of the higher timeframe to close all of your positions.

Most of the false breakouts are sure shot trades in the market. Place the stop loss just below the recent low, or at the closing of the most recent candle. If you are a conservative trader, then put stop loss bit spacious to your entry point.

In the below image, we have placed the stop loss just below the closing of the recent candle, and we have captured the 4R trade in the market.

Bottom line

It is essential to learn the logic and psychology behind any false breakout. Most of the time, the risk is small in these types of trades, and it is important not to be greedy while placing more extended targets. If there is no momentum in the market, close your positions, and if the trend is healthy to go for longer moves. You can still trade the regular breakouts, but throw relatively less money when compared to the false breakout trades. Also, make sure to practice trading false breakouts in a demo account until you master it. We hope you liked this article. Cheers!

Categories
Forex Psychology

The Importance of Mastering Trading Psychology

Introduction


As traders, we tend to learn the technical stuff and focus our attention on improving our technical analysis. Which is ok, but often, learning trading psychology is neglected. And at the end of the day, it is you who’s in charge of decision making, and you are the one entering your orders.

In my mind, mastering trading psychology is more important than learning chart patterns, complex wave theories, Fibonacci levels, etc. Even a layman can spot a trend, but then the decision has to be executed – do you buy or sell?

Our emotions govern decision making as they impact our rational thinking. You can do an exceptional technical analysis, but you may still lose money. You can do a poor technical analysis and still earn money.

The question imposes: why are traders who are knowledgeable about technical analysis still lose money?

The answer lies in the difference between real life and the markets and the ways we are conditioned to behave in real life vs. the mindset that is needed to be profitable in the markets.


Real-life vs. the markets


Cutting your loses 

In real life, people are not accustomed to losing. If your finger gets trapped inside the elevator hole, you would probably turn on the alarm, stop the entire building from using the elevator and call the fire brigade to help save your finger, right? You wouldn’t just cut it off and continue with your day because, in real life, fingers don’t grow back.

In the market, if your finger gets caught and you try to save it with your other hand, the other hand will get trapped as well, and you will lose both hands. So the solution would be to just cut your finger, as in the markets, fingers do grow back!

As you may have figured, the Finger analogy is when your position is starting to go against you. If you sit there and wait for it to bounce back, hoping you wouldn’t lose your money, you will lose more money. And the only solution is to cut your losses early on and have confidence that you will be in profit next time when you will be compensated for your losses and be in profit overall.

So this response has to be learned, as we have been conditioned to behave and think differently.

You shouldn’t be right, you should be in profit. 

Traders often feed their ego with their good analysis. Your ego tends to think that you should always be right and that being wrong is a very, very bad thing. That can sometimes create a bias rationale. For example, you have done tons and tons of research, and your fundamental and technical analysis; so, you have concluded that it’s a buy. You put your buy order.

After a day or two, you are in profit, good. But on the third day, the trade is starting to go against you. You keep saying to your self “it’s only a correction” I have done my research, and this can’t go down further. But it does. Even though you see you are losing money, you tend to keep your position opened. Why is that? Your brain creates a bias. It can’t even see an alternative bearish scenario, so you become loyal to yourself, as your ego also keep you congruent.

In real life, loyalty and congruency are great. If we didn’t have those traits, we would all be unreliable and spinless beings, and society as we know it would fall apart. But in the markets, you have to be able to adapt.

This is not about being right, you are not a fortune teller, you are a trader.

Numbing your emotions and the difference between knowledge and behavior 

Expanding your knowledge about financial markets and the ways of analyzing them is great, but you have to internalize it into your behavior patterns. For example, I smoke cigarettes, and I know that they are harmful. The knowledge about the harmful effects of smoking is not overpowering my internal emotions of the desire to smoke.

Another example is exercise. We all know that we should eat healthy food and exercise. But the fast-food tastes good, and our emotions are governing our decision making, and we end eating that burger. Our laziness chains us to our beds, and we hit that snooze button and sleep an extra hour, leaving us without any time to run in the morning.

That is why we, as traders, need to suppress our emotions of greed and fear that can impact our decision making.

Patience

In the modern-day world, we are bombarded with information through social media. If something doesn’t appear interesting, we are hesitant to watch it to the end. That conditions us to follow our attention and not to be in charge of it. And that’s ok in real life, as our attention is limited, and with so much out there, it would be impossible to keep track of everything.

But in the market, you have to leave that urge behind to know if it is a buy or sell, and get it over with. Trading is an activity.


Conclusion


The market environment is diametrically different from the real-life environment – it’s totally unpredictable, and we need a totally different mindset to overcome the challenges of surviving in that environment.

In real life, you would go to a train station ask a clerk where the next train is going, and if you like the direction, you would sit on that train, take a nap, and when you wake up, you would arrive at your desired destination. It is predictable, and we are accustomed to that predictability, and our behavior has been built around that predictability.

You would check your indicators in markets, make your projections, ask people what they think, where the train is heading, and still won’t have a definitive answer.

That’s why mastering trading psychology is so important. It is the way to help you find the right mindset to manage the unpredictable nature of the markets, and here at Forex Academy, we are here to help with our services.