Conquering Your Psychological Problems For Successful Forex Trading
What we have talked about so far is the need to alter your mindset to match that of experienced traders. Let’s have a look at the various psychological concepts that you need to understand and accept. The Forex market is crowded with traders who use the same news, market material, analytical forecasts and transaction procedures. But very few of them make any real money.
Most novices lose money because of the costly mistakes they make, either on their own or by blindly following what others are doing. These mistakes occur not because of any inherent problems with the trading process but because of the errant psychological traits they adopt.
1. One of the most popular Forex rules is “Follow the trends, they are your friends.” The problem is that beginners do not understand what this statement really means and make mistakes as a consequence. For instance, a release of key fundamental data from a country may produce values so different from those predicted that they cause the relevant currency pair to spike sharply. Under these circumstances, experts would bide their time waiting for all the data to be digested by the market before taking action. This would safeguard them from any sudden reversals. Novices, on the other hand, have a tendency to leap in straight away as they fear they may miss out on a golden profit opportunity. They fail to realize that the real trend will appear sometime after the release and it could be active for hours, if not days, afterwards.
Similarly, beginners rush in if they observe a sharp movement on Forex charts before they completely understand the underlying cause. Should this eventually prove to be a false alarm, they would be in trouble because they would already be trading at a loss. Take your time to analyze each situation carefully and never be too eager to enter the market unprepared. Once you have digested all the relevant information, you can then action a trade, if you deem fit, with the knowledge that you have undertaken the best evaluation possible.
2. Greed has a mind-numbing effect on novice traders because they set themselves unrealistic profit targets. Instead of choosing a sensible objective of a 10 to 30% annual return, they aim to double or treble their initial startup value in a matter of months. This is suicidal unless you are a proven Forex expert. And even they would think twice because they know the bigger the return the bigger the risk.
In today’s Forex market, most currency pairs fluctuate between 100-300 PIPs daily. As such, aiming to gain a target of 50-100 PIPs daily is, in fact, readily achievable. However, novices are not satisfied with this result because they regard it as too meager and so they push their luck for higher rewards. The increased and uncontrolled risks eventually lead to large losses. To overcome greediness, you must practice discipline and stick rigidly to realistic objectives. Should you be lucky and achieve your target early in the day, stop trading and take a break until the following day. Use the down time to study and learn more about Forex trading.
3. This next psychological concern is one that runs deep into the well of human emotions and is hard for all traders, especially novices, to combat without strong discipline. Basically, traders are extremely reluctant to admit when they have made mistakes and to act accordingly by cutting their losses.
Forex price fluctuations can produce bullish, bearish or flat trends. An important maxim is never trade against the trend. However, at some time or other, all traders find themselves in this position for one reason or another.
Under these conditions, experts would apply sound money management techniques by defining sensible stop loss positions and would exit the trade should the stop be reached. By doing so, they would only suffer an acceptable loss and would, more importantly, still be able to survive and fight another day with most of their margin intact.
Beginners, on the other hand, are very uncomfortable dealing with this problem because they lack a clear understanding of the principles of money management. Rather than accept the loss, they tend to keep moving their stop loss positions in the direction against the trend hoping the market will reverse and they will be able to recoup their losses. They do not appreciate that no person can predict the end of a trend – only market forces, whose movement cannot be guaranteed, can determine that.
As such, they eventually incur huge losses that seriously reduce their account balances and place their entire trading survival at risk. Even worse, they repeat this mistake continually unless they are able to take corrective action by altering their mindset.
Another common mistake novices often make is to hedge in an attempt to recover from the original loss. Hedging is a situation where a trader has both, buy and sell positions active simultaneously with the same currency pair. This can work and limit losses if done by an expert. When done by beginners, all it does is camouflage the losses until they are too large to be hidden any more. By then it is often too late to recover.
The best way to counter this danger is by having sound money management practices in place. Basically money management will show you that it is better to accept a small loss of 20 to 30 PIPs rather than gamble on the market recovering and losing 200 to 300 PIPs when it does not.
4. After traders have experienced a few unsuccessful consecutive trades that have produced huge losses, most suffer a dramatic drop in confidence. And then they feel that nothing they do seems to work. In fact, under these conditions you can quite easily become paranoid and develop a fear that the Forex market is haunting you personally and trying to destroy you.
What happens then is that when a new trade becomes profitable, you tend to close it prematurely in fear of a possible rebound. Beginners are unable to follow the Forex maxim ‘Cut losses early and let profits run.’ To overcome this problem, you must take your time building up your confidence and developing a positive mindset. You will, without question, take a significant number of months to complete this plan properly by demo and live trading and by using very small margins, but this is much better than wildly gambling without knowing what you are doing.
At the end of your training, you will have learnt how to make changes to your trading system in small increments of risk. You will have also developed a trading methodology with both a positive win: loss ratio and expectancy value. You will be well-versed in money management strategies. Without these steps to develop a scientific and business-like mindset, the Forex market will, almost certainly, chew you up and spit you out.
5. New traders have a serious problem in that they tend to overtrade. They do not understand the significance of leveraging and as a result they take unrealistic risks by trading far too much of their available margin. As a rule of thumb, never trade more than 10% of your margin, start off with just two percent.
So in conclusion, Forex is a very complicated business and trading is certainly not easy. If this were not the case, then every trader would be a millionaire, whereas in reality, 95% lose most, if not all, of their full account balances very quickly.
The Forex market is just too complex to be taken lightly as it involves many powerful factors and forces that can produce sudden dramatic effects on the daily fluctuations of currency pairs. Unfortunately, neither technical nor fundamental analysis can forecast the Forex market with consistent accuracy.
This is why you must invest more time by improving your trading mindset. You can begin to do this by conquering the psychological problems we have spoken about in this article.
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