Understand the Psychology of Forex Trading
Gains and losses are both inevitable once you begin trading the Forex market. Individuals cannot necessarily control whether they will have a good or bad trading experience on a particular day. Due to the lack of control they hold, some people find trading on the Forex market disheartening. After all, learning to trade takes time, careful study, and lots of patience. Even if you do your best, you might have to walk away in the red when you finish trading for the day. However, there are ways that you can take control of your mind and emotions to maximise your profits and minimise your risky gambles. Are you looking to improve your Forex education? Read on to understand the psychology of Forex trading.
Centre Your Focus
When researching Forex trading, it is easy to become distracted by (or envious of) other people’s success stories. Take inspiration from others’ research, but keep your mind focused on your own trading.
- If an experienced trader chooses to work with a currency you do not know well, observe the trades they make (if they allow you to), but it may be wise to continue using the currency pairs you are more familiar with.
- Some success stories have been born from convenient economic changes that benefited the Forex market. Those changes may have happened long ago, so enacting the same strategies and taking similar risks may not always work in the current market. Take advice from others with more Forex trading experience but realise that it may not be a good idea to copy directly off the trades they have made in the past. When you research, be sure you are looking at recent information. This will help you to make informed and accurate trades.
- If you are looking to meet fellow Forex traders but are unsure how to do so, consider joining a Forex community. Guerrilla Trading’s Forex community includes a beginner-friendly Forex trading forum. You can easily access the community through our free Forex trading app.
Avoid the Fear of Missing Out
In the modern world, FOMO (the fear of missing out) is an emotional state many of us experience while browsing social media. When you scroll through pictures of fun locations or great food, you may grow envious of others and their life experiences. This can cause you to doubt your own actions. You may throw out an excellent trading strategy that has worked well for you and attempt to use new trading techniques or currency pairs that you have not taken the time to research thoroughly. You may rush to buy, then rush to sell, and flop in the Forex market due to your lack of research. If FOMO is tough to ignore, try following these steps to put it out of your mind:
Become a Master of Your Currency Pair
Research the economies that back the currency pairs you choose to trade. Read multiple news stories. Tailor your Forex education towards your currency pair. Once you feel you have become a master researcher, you can consider branching out and trading additional currency pairs each day.
Don’t Be Swayed By Rumours
Forex communities can be beneficial. However, one downside of joining is that you may encounter many rumours. We encourage you to check the sources of the news you read. Speak with experienced traders in your community.
Don’t be discouraged by common trading myths, such as the myth that you cannot become a successful trader unless you have a large bank account to start with. While it is true that you should have some excess funds to trade safely, you do not need to be wealthy to start trading.
Be Proud of Your Own Achievements
Take notes on your Forex trading experience. Some days you will gain money while on others you will lose money. Look for signs of self-improvement in your trades. Perhaps you are disappointed that you lost 900 pounds in a trade. This loss may discourage you until you remember that you were reluctant to trade more than 100 pounds at a time when you first started. You may remember that in another recent trade, you successfully earned 700 pounds and gained valuable trading experience. Celebrate your achievements as you continue building your Forex education.
Manage Your Emotions
Every trader will approach trading with their unique perspective and personality. Here are some notable emotions that are worth mentioning:
If you miss out on a great trade by just a few seconds, it’s no surprise if you feel frustrated. You may also experience anger when you see prices falling when you want to sell or staying high when you wish to buy. Communicating with your broker could also be a frustrating experience. Any time you are angry, you are at risk of making impulsive trades in an attempt to “get even” or “cut your losses.” If you refuse to go home while “in the red” and double down on losing trades, your anger may be managing you instead of the other way around.
Truthfully, the best way to learn Forex trading is to approach it with a calm, thoughtful mindset. Consider the numbers you see in front of you. Remind yourself that everyone who trades on the Forex market will have lousy trading days. Every Forex mentor will confirm that even experienced traders who have traded for years must sometimes face annoying losses. While the Forex market can bring you rewards, risks are always involved.
Don’t start trading until you are ready to have a positive attitude. Treat Forex trading the way you would treat an office job. Be awake, focused, and prepared to put in quality work to receive the best results.
Fearful traders may be tempted to close their trades early, pull back their money, and not open new positions on the Forex market. When a trader withdraws and stops looking at the market out of fear, they may miss out on great opportunities for trading that they would have liked to act upon.
Those who are fearful are usually inexperienced traders who are not yet confident in their actions. They may not have a good understanding of trading strategies. They may not know how to recognise if the market is bull vs bear or what they should do about it. Someone fearful may sit in front of their trading software, facing a great trade, and be unaware of it. An anxious trader may lose less money because they do not risk as much on the Forex market. However, someone who is fearful is not likely to make a profit either.
One cure for fear is taking the time to gain a proper Forex education. Consider taking a short Forex trading course or working one-on-one with a Forex mentor for a few weeks.
Greed will convince you that true happiness comes from having the maximum amount of wealth possible. If you give into greedy impulses, it can cause you to make risky trades in an attempt to gain more and lose less. Examples of big risks you may indulge in include:
- Doubling down on losing trades, resulting in more significant losses.
- Choosing to hold out for too long before making a trade, believing the value will continue rising. If it doesn’t, you are out on that trade. If you do this consistently, you may pour a lot of time and money into the Forex market without trading enough to profit.
- Relying on too much leverage in an attempt to maximise your gains. As a result, you may need to pay your broker large sums to cover what they loaned you. If your trades fail, high leverage can even wipe out your whole account.
When you control your greed, you can still take risks if you would like to, but you will be able to take them more responsibly. For example, when you are thoughtful with your risk-taking, you are more likely to take risks using only funds you can afford to lose instead of the funds you need to pay off bills. By risking only excess funds, you are much more likely to have a safer, less stressful, and more enjoyable trading experience. In the long run, this may lead to a more profitable Forex experience.
Strive to manage your risks. Decide in advance how much money you are willing to lose while trading. Cap yourself off before you exceed that amount. Learn to say no to yourself so you can trade safely on the Forex market. Exercising self-restraint is the key to becoming a successful and experienced trader.
When you rush into trades, you are more likely to make costly mistakes. These mistakes might be very simple, such as mistyping the currency pairs you wish to trade, but even simple mistakes can lead to dramatic consequences. You can work to curb your impatience by setting small daily goals for yourself or by taking time away from trading for a few minutes or house until you are ready to start trading again.
Many inexperienced traders may believe that after a month of trading, they may be able to quit their jobs. Or, they may think they can start with $5,000 and turn it into $50,000 of profit with little effort. Having unrealistic expectations when you begin trading can cause you to feel impatient about a lack of significant progress in your trading experience.
If you have an impatient mind, you may feel anxious while waiting for trade results. You may be desperate to receive large payouts immediately, which may lead you to invest time and money in risky trades or borrow steep amounts of leverage. While these quick, decisive actions could theoretically lead to a nice profit, it is far more likely that you will lose a significant amount of money due to these actions. Experienced traders recommend that you take small, daily steps towards success. Remember that although a 2% increase may not look significant, that 2% could represent $2,000 or more dollars that you could have in your pocket at the end of every week. Making small trades can lead to long-term profits that you will soon be grateful for.
Most of the time, euphoria is considered a positive emotion. However, it is crucial to note that if you indulge yourself in overly excited, positive feelings about your trading experience, you may lose sight of the risks involved. Trading on the Forex market can be difficult, and you deserve to celebrate your profits. However, you should also be aware that overconfidence can lead to disaster. Always trade cautiously with your money, especially just after a noteworthy success. This will help you profit from the Forex market without losing your gains too quickly.
Staying in Control
An unfortunate fact of life is that human emotion can often get in the way of your trading. Emotions can cause you to be too risky (or too conservative) in your trades. Getting a handle on – and saying in control – of your emotions and overall psychology regarding Forex trading is a crucial step. Our advice? The best way to learn Forex trading is with the help of an experienced Forex mentor. A Forex mentor can offer you personalised advice to help you improve your Forex trading skills.
If a personal Forex mentor or a full Forex trading course is not your preferred way to receive a Forex education, then don’t despair. We offer many free resources that you can turn to so you can learn Forex trading for beginners at your own pace. If you learn better when you are engaging in live trades alongside a large group of peers, then you may also be interested in downloading our free Forex trading app. Signing in to the free app will allow you to access our Forex trading forums for beginners easily.
Although you may not become wealthy overnight, you can grow your funds daily by making wise choices when trading on the Forex market. Regularly ending a week with a few thousand pounds in your pocket could change your life.
We can’t wait to see you join our trading community!
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Do you want to learn more about Forex? Or would you like to understand how Forex experts achieve their trading goals? Speak with our team now and we will be more than happy to help.