The Psychology of Trading

Many people will try and tell you – or more ominously sell you – the secret of success as a Forex trader. However when push comes to shove, what really matters is how you manage your trades and how you manage your emotions – get those things right and you should be on track for success.

Pressure can always be a killer and pressure comes from unrealistic expectations – expecting to make overnight fortunes, give up existing employment and so on. That in turn adds to the pressure to try and make money which in turn leads to the danger of trading emotionally which is a cast iron recipe for disaster.

Human beings are emotional in a way that machines, outside the realms of science fiction, never are. Various emotions can play dangerously with what ought to be your better judgement.

Let’s consider a few of them starting with greed. A greedy trader will never be satisfied and may miss out on profit by hanging on too long in the hope of earning more and more. Another example of greed is adding to trading just because the market is showing tiny gains.

Fear is another dangerous emotion, showing up in a new trader who is scared to get out there and trade or when they have traded and the market has treated them harshly.

The only remedy is to ensure that you never risk more money then you can emotionally and financially afford to lose.  The long term danger is that fear will inhibit the trader and cause him to miss out on good opportunities.

Another dangerous emotion for a market trader is the desire to “take revenge” on the market because of a previous loss that you have sustained. There are no sure fire winners in trading any more than on the racecourse and your push to make up previous losses may only lead to you losing more.

In many ways the psychology of market trading is that of everyday life. Imagine driving your car when paralysed with fear or rushing to overtake another motorist despite the danger.

Control your emotions and hope to profit from that control.