It is easy for traders to feel confident in their ability to feel calm and committed in order to start their trading sessions before the market opens. However, once time passes and the markets open, it's an entirely different story. When faced with real financial decisions, it is all too easy for emotions to come into play. We cannot avoid our emotions, but we can learn to overcome them.
Traders cannot succumb to feelings of excitement, fear or greed when trading, as they can cause costly and irreversible mistakes. Psychologically assess yourself by determining if you are exposed to one of the following psychological biases in forex trading:
1. The psychology of blind trust: the market will move on there.
2. The psychology of linkage: this probably means this.
3. The psychology of assertion: This also proves that I am right.
4. The psychology of loss bias: I hope the price will return.
Notice how the different psychologys overlap, because no matter how you look at them, all of these biases, they all stem from fear. However, we will discuss it in detail, because the first essential step is to become aware of the existence of our emotions and to control them properly.
The psychology of blind trust
The first lesson in the psychology of forex trading is to pay attention to the trance of trading. Humans are, of course, self-centered first. Our ego wants to be validated by proving that we know what we're doing, and that we're better than the average person. Any hint that confirms these ideas only enhances our self-image through a distinct sense of self-love.
The problem is that this is where traders are most likely to succumb to the overconfidence bias. It is not uncommon when traders complete a winning streak of winning trades after which they think that they cannot make mistakes in the future. Thinking this is unwise, of course, and it will end in failure. Make sure you always analyze the trading sessions and look at the gains and losses in detail.
This is the only way you can stay on top of your trading. Allow yourself to make mistakes—and don't make the mistake of being afraid to prove yourself wrong—you'll be better off for you in the long run. You should be comfortable accepting mistakes and realizing that they are inevitable, especially in the early stages of trading. It's all part of the forex learning curve.
The psychology of linking
This is about the mental comfort zones that traders create when doing market analysis, by ultimately thinking that the future will be the same as the present, based on why the present appears as it was in the past. As with other emotional biases in the psychology of forex trading, they are borrowed directly from social studies.
Connectivity is the tendency to rely on what is previously known to the trader to make decisions in the future, rather than considering new situations and the changes they can bring. Sometimes, linkage tends to make traders rely on outdated information
It is easy for traders to feel confident in their ability to feel calm and committed in order to start their trading sessions before the market opens. However, once time passes and the markets open, it's an entirely different story. When faced with real financial decisions, it is all too easy for emotions to come into play. We cannot avoid our emotions, but we can learn to overcome them.
Traders cannot succumb to feelings of excitement, fear or greed when trading, as they can cause costly and irreversible mistakes. Psychologically assess yourself by determining if you are exposed to one of the following psychological biases in forex trading:
1. The psychology of blind trust: the market will move on there.
2. The psychology of linkage: this probably means this.
3. The psychology of assertion: This also proves that I am right.
4. The psychology of loss bias: I hope the price will return.
Notice how the different psychologys overlap, because no matter how you look at them, all of these biases, they all stem from fear. However, we will discuss it in detail, because the first essential step is to become aware of the existence of our emotions and to control them properly.
The psychology of blind trust
The first lesson in the psychology of forex trading is to pay attention to the trance of trading. Humans are, of course, self-centered first. Our ego wants to be validated by proving that we know what we're doing, and that we're better than the average person. Any hint that confirms these ideas only enhances our self-image through a distinct sense of self-love.
The problem is that this is where traders are most likely to succumb to the overconfidence bias. It is not uncommon when traders complete a winning streak of winning trades after which they think that they cannot make mistakes in the future. Thinking this is unwise, of course, and it will end in failure. Make sure you always analyze the trading sessions and look at the gains and losses in detail.
This is the only way you can stay on top of your trading. Allow yourself to make mistakes—and don't make the mistake of being afraid to prove yourself wrong—you'll be better off for you in the long run. You should be comfortable accepting mistakes and realizing that they are inevitable, especially in the early stages of trading. It's all part of the forex learning curve.
The psychology of linking
This is about the mental comfort zones that traders create when doing market analysis, by ultimately thinking that the future will be the same as the present, based on why the present appears as it was in the past. As with other emotional biases in the psychology of forex trading, they are borrowed directly from social studies.
Connectivity is the tendency to rely on what is previously known to the trader to make decisions in the future, rather than considering new situations and the changes they can bring. Sometimes, linkage tends to make traders rely on outdated and irrelevant information, which of course will not help them trade successfully.
In practice, this manifests itself in traders who keep losing trades open for a long time, simply because they fail to consider options outside their comfort zone. You should not be afraid to try new things when trading forex - be ready to try new strategies, and go against what you already know. By associating yourself with outdated strategies and knowledge, you only increase the possibility of bigger losses.
The psychology of affirmation
Confirmation bias is the most common factor among professional traders. Seeking out information that supports your decision, even if it isn't the best decision, is just a way to justify your actions and strategies. The problem is that by doing this, you are not actually improving your methods, and you will continue to make the same trading mistakes. Unfortunately, this can create an infinite loopThe psychology of forex trading can be hard to break.
The worst of the confirmation bias scenario is that the trader will simply waste valuable time looking for what they already know to be true. However, what is worse is that he will not only lose time, but also money and motivation to trade. A trader must learn to trust himself, be happy to use his wits to develop profitable strategies, and then be able to follow them without fear or doubt.
The psychology of loss aversion
The psychology of loss aversion is derived from probability theory. Humans have a funny way of evaluating gains and losses, as well as comparing their perceived meanings with each other. For example, when considering our options before making a decision, we are more willing to give the probability of a possible loss a preference than the probability of a possible gain. Fear is a much stronger motivator than greed. In practice, a trader with a loss bias would cut profits when they are collected while they are still low, for fear of losses.
Summary of psychology in trading
There is only one tip for solving the problems of traders that can be gleaned from studying the psychology of forex trading - and that is to make a trading plan and stick to it. A trader who is in doubt, should never hesitate to look for any other available solution, but it is likely that they will return to a simple trading plan. It is understandable that traders feel intimidated when trading.
However, being able to push this fear aside and act on it is very important for any trader who wants to be successful. Practice trading, take notes, research new strategies, and make mistakes. Trial and error is a huge part of the forex learning curve, and generations of traders have proven that this is the most effective way to eliminate trading fears.
You may want to consider the following example as a reference point if you start to doubt yourself: Dr. Alexander Elder, in one of his lectures, told the story of an old friend of his, a private trader who was choppy and lacking in both profit and loss experience. Within two years, this trader's name ended up in the list of the best money managers in the United States. When Elder asked "How, what has changed?" “I use the same trading strategy that I always use,” the trader said. “What has changed is that I have stopped trading against myself and my established strategy.”
This money manager pulled a mental trick on himself. When he was still a private trader and was inconsistently profitable, he pretended he was working for an investment company and had a real manager, who gave him a trading strategy and left it for a year, leaving the man in charge with one option.
When the manager returns, the trader's performance will not be judged by how much money he made, but by the accuracy with which he followed the strategy. In other words, he split his trading into two separate roles - the planner, who had no exposure to the market, and the executor, who had no say in planning. What's more, this plan worked!