Although a well-rounded trading plan and knowlege of technical analysis is important, for those looking to truly immerse themselves in the world of forex, you also need to know the psychology involved when it comes to perfecting your forex trading strategies.

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Believe it or not, trading psychology is an essential part of your success in the forex market as it requires good judgement, patients and self-control to make a  calculated decision on when to enter and exit a trade. Nevertheless, emotions are human nature, and these emotions often cloud judgement and lead to poor trading. 

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In this lesson, we’ll explain the psychological journey of forex traders – giving you with the right knowlege to recognise the positive and negative emotions involved in trading, how they may impact forex trading strategies and how to use them to your advantage. With this knowledge, you’ll be able to plan and adapt your forex trading skills to suit your personality and make better-informed trading decisions.

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The big four

 

When it comes to the psychological effects of trading, there are four main emotions that are at play, andyou must learn to control all four if you want to effectively manage your mindset while trading.

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These trading emotions are: fear, greed, revenge and euphoria. Each of these emotions typically have negative connotations when we're talking about trading as they can lead even professional traders to start making irrational decisions that can lead to bigger losses. However, if these emotions are understood and used in correctly way within your trading they can also be valuable assets for successful trading career.

 

The Fear in Trading 

 

Fear plays a crucial part in forex trading. It is one of our most fundamental emotions, experiencing fear is perfectly normal. Nevertheless, fear can lead us to make irrational, emotionally-led decisions that can cause trading losses.

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Fear is a dangerous emotions it has the potential to introduce doubt into your decision making process, making you hesitant and resulting in you convincing yourself that you’re making the wrong decision. This negatively impacts your ability to  assess situations with clarity and could mean missed opportunities of successful trades, just as much as it could lead to losses.

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But this is not the only emotion to negatively impact trading decisions. There’s also the fear of missing out, also known as "FOMO". Just like in your everyday life, this need to not miss out on good trades can negatively affect the decisions you make as a trader, resulting in greater risks – for example, entering deals without doing due diligence on whether there is real profitability. If you allow yourself to become a trader that’s dictated by fear, you’ll soon find you lose your sense of rationale when it comes to making informative decisions.

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That being said, we all need a sense of fear to allow us to analyse the risk in situations. When harnessed correctly within your forex trading strategies, fear can be controlled and in fact become a valuable asset that helps you to retain a clear and level-headed perspective.

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The first step to this is recognising what you’re afraid of and why, which for most traders is likely to be the loss of your hard-earned money. The second step is to construct a well-thought out forex trading plan that works to minimise this outcome by taking calculated risks. This could include limiting the number of currencies you trade in and implementing a cap on the amounts you trade so you have a better handle on your potential losses.

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Taking a measured and educated approach that uses fear in a controlled way to analyse both the markets and your own personal liquidity will ensure you’re making more rational decisions overall. Even when losses are made, with sound decisions, they should be easier to recover from, rather than letting fear take hold and allowing losses to spiral out of control.

 

Gain control of greed

 

Most people get into forex trading to make money and, when the markets are up, this desire and ambition can be a brilliant motivator. On the other hand, it can also turn into greed – a selfish emotion that can, in some cases, be more dangerous than fear.

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Like fear, if left unchecked, greed can become a powerful psychological factor with sometimes devastating consequences. Common sense and rational thought are often the first things to suffer when greed takes hold, and while fear may cause you to be too cautious, greed has the opposite effect – fuelling the constant yearning to make substantial profits through risky trades.

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Naturally, this isn’t a sustainable way to trade forex as it can lead to an empty trade account and heavy losses. However, there are ways you can manage greed more effectively to ensure it doesn’t have a damaging effect on your FX trading career.

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Greed is typically an instinctive behaviour – a deep-seated part of a person’s psyche that makes them want to achieve more, be that social status, monetary value or anything else. When it comes to creating your forex trading strategies, it’s important to recognise signs of greed in your own personality. Have you always been driven by monetary value and highly competitive? If the answer is yes, this could suggest you might be more susceptible to greed in this fast-paced and exciting world of currency trading.

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To overcome this obstacle, it’s advisable to devise a robust forex trading plan that you stick to at all times, even when you make substantial profits. This means ensuring your forex trading strategies are based upon rational business decisions and uses best practices for managing and assessing the risks of each and every trade deal. This includes reminding yourself frequently that you shouldn’t trade any amount of money you can’t afford to lose. Additionally, this should entail ensuring that all your forex trade deal decisions are made on real data analysis and not on greedy, emotional whims or unfounded gut instincts.