What Is Forex Trading Psychology?
Forex trading psychology refers to a trader’s emotions and their mental state. It is one of the most important deciding factors of whether a trader will make it or not . It is also about a trader’s character which plays a big role in influencing their trading decisions. Most failures in Forex trading are more about how traders manage themselves.
Manage Yourself, Manage Your Money
I always say that if you can manage yourself, you can definitely manage your money. Most traders think that the most important thing for successful trading, is finding amazing tools and trading strategies. I also understand that we cannot control what happens in the markets, but we can always control ourselves. Now that we know what Forex trading psychology refers to, let’s look at the few specific behaviours and emotions that can be associated with it.
In whatever that we do, we mostly need a certain level of discipline, without it, chances of being successful are limited. I will make an example with trying to keep fit and getting healthier, we need a lot of self discipline/control in terms of what we eat and also making sure that we get moving and exercise. If we lack self control, we will feel tempted to eat junk food and justify it by saying that everyone around us was eating junk. I love using these as examples because I know how difficult it is for most people to discipline themselves in terms of what they should eat and not eat. Healthy eating is one of the important things that I am passionate about because health is wealth. Let me go back to the business of today before I go on and on about food and health.
How Important Is Self Discipline?
When it comes to Forex trading, discipline should be your strongest weapon. If you cannot discipline yourself in the markets, the markets will sure discipline you through a margin call and that is not a nice thing to experience as a trader. Disciplining yourself involves you saying NO to that urge to trade all the time/over trading, using a bigger lot size when your account is small and risking more that what your account could handle.
What Happens When You Lack Discipline?
When you lack discipline, Forex trading feels like a very bad addiction. When you lack discipline, you are unable to stick to your own plan. The good thing is that discipline is something that can be learned, as long as there’s a will to learn and enough support from a Forex trading mentor/coach. I have learned that it is easier to win when you have a support system to help you up when you stumble (that’s basically what I do with my mentees). A mentor/coach clears a way ahead for you. I never do anything without a mentor/coach until I can stand on my own. Normalise doing the same, it really helps.
When fear strikes, you are likely to miss out on great trading opportunities for the fear of making mistakes and losing money (especially if you’ve made some mistakes that lead to you losing money). The fear of missing out is also another form of fear that is associated with Forex trading psychology. When this type of fear strikes, a trader feels like if a day goes by without placing any trades, they are definitely missing out. But the truth is, a missed trade is never a loss. There’s another type of fear that I won’t indulge in that much on this post, and that is the fear of success. You can read all about it in the post that I published a year ago, HERE.
According to its definition, greed is a selfish want for something beyond one’s need. A greedy trader is a trader who is never satisfied no matter how great their trading session can be, it always ends very bad. No matter how much they make in a day, it always ends in great losses at the end of the day. A greedy trader never takes money home, it only goes as far as trading history. The good thing again is that, this is something that can be unlearned, as long as you’ve identified and acknowledged it, you can learn NOT to be greedy. Unlearning forms a big part of learning, read more about that HERE. A while ago, I published a post about overcoming GREED, you may want to check it out.
Forex trading psychology is also that one area that I focus the most on. I recently started posting weekly tips on the App that are mainly focusing on Forex trading psychology. The main aim is to help you shape your mindset and gear it up for better trading experiences. The weekly tips are only posted on the app. You can download the app on Google Playstore and make sure that your device allows push notifications to be notified whenever a new weekly tip on Forex trading psychology to improve your trading is posted. Thank you so much for stopping by.
I really hope that this post added some value in your trading journey. To help me reach out to more people who may be in need of this content, kindly share this post and subscribe for future publications. Keep well, wear that mask, wash your hands, practice social distancing, sanitise and stay safe.
What Is Margin Call?
Margin call: When your trading account does not have enough funds to sustain open losing trades. The broker will then close all your positions automatically one by one until the account shuts down completely. You could have an account with a $5 000 balance but still end up with an account with zero balance in an instant. It happened to me, you can read all about it Here.
Forex trading can deceptively appear as the easiest thing ever whereby one only needs a cellphone and technical indicators to confirm some lines and that’s it. Because of that notion, most people are venturing into Forex with high expectations to profit from it but not enough information of what is really needed from them. One has to be a realist and know their abilities and limitations when it comes to Forex. Fortunately though, it is a skill that anyone can learn, as long as there’s willingness.
One of the most painful things a trader can experience is margin call. Majority of Forex traders have had this unpleasant experience, yours truly included. That experience does not only leave you shocked but extremely ashamed and embarrassed. Below are the 3 ways to avoid margin call.
1. Mind Your Margins
Having a live trading account with no clue of what a margin is, was my biggest downfall. Knowing all the other details on my platform, like the balance (which is really not that important now that I am well-informed) neglecting what I now think is the most important part, your margin, free margin & margin level. You don’t want to deplete your free margin because that’s what gets your account to margin call. Know what gets allocated to each trade. That is golden information that you need to understand the most.
2. Avoid Bigger Lot Size
There is absolutely nothing wrong with trading a bigger lot size as long as your account can handle it. In fact, in Forex trading, size does matter. A bigger lot size allows you to make bigger profits (and bigger everything else such as losses, which is something that can be controlled with the right coaching and mindset)
Knowing whether your account can handle it or not, lies in the margin for each lot size that you trade. This is the part that I emphasise the most in my private coaching, as I believe it forms a bigger part of money management. I also try by all means to simplify this in a way that makes it easier for my mentees to understand it like a business cost without bombarding them with lot size calculators and a whole lot of complicated systems. I am a simple girl who believes in simplicity.
3. Avoid multiple trades
Because most people do not have a clue of what really causes margin call ( I think I have tried to explain that and I hope you now have a slight idea) they usually just open as many trades as possible hoping to maximise the chances of making more profits. Opening more trades simply means that you’ll use more margin and increase the chances of depleting your free margin which will eventually lead to margin call, should those trades go to bigger losses.
No matter how good your trading strategy is, if your money is not well managed, you are playing a losing game. The last point that I want to get across is that the internet is your main tool in Forex trading. You cannot really do much without good connection. The markets do not care if your internet is slow. If you have live trades, be sure you have good internet connection especially if you are a day trader. Thank you for stopping by. I hope you find this post valuable. If you do, kindly share with your peers so it can reach as many people as possible who are looking for practical Forex tips.
Mind your personality
I believe as people we are different, we have different ways of doing things. Our personalities play a big role in the type of businesses or careers that we end up choosing . I am fully aware that as traders, we are all different in our personalities and needs, therefore we ought to have or prefer different styles of trading.
Questions become answers
The simplest way to find out the type of a trader that you are, is to ask yourself some questions such as, are you impulsive or nervous, or are you a calm person in general, do you get anxious when things don’t go your way? These kind of questions can actually give you an idea of what style you should be adopting when it comes to Forex trading. I have found my own and I have been sticking to it for years. I had to unlearn some personality traits to make it work. That can also be done.
Below I will list a few Forex personalities that I think you can be able to identify your own style and be able to choose the trading style that can best suit you, your personality and your lifestyle. Understanding your own needs is key to identifying your preferred method. Some of the personality traits can be unlearned as long as you are allowing yourself to unlearn them. A good mentor/coach is able to assist with such behavioural issues, because some of them can be changed by adopting new habits.
Simplicity and effectiveness is what this type of trader looks for. Complicated systems confuse this type. They are just cool with a simple yet effective system, steadiness is also important to this type, BUT unfortunately the markets aren’t as straight forward. Some reading will surely be required. This is the fact that we cannot dismiss. Looking at the current markets conditions, one cannot just rely on a “pluck & go” system.
This type of person is nervous by nature, this trader becomes so nervous to handle multiple open positions, has a low risk tolerance and does not feel comfortable taking long term trades. If this type happens to enter a long term trade, they will have sleepless nights thinking of what might happen in the markets.. So in short, this trader is best suited for small volumes, and should be staying away from systems that rely heavily on leverage, because all this can cause negative emotions. short term trades is best suited for this type.
This type prefers to have a very little contact with the system and isn’t really a fan of computers. They prefer a system that is able to run on its own. I think this type can do well on autopilot trading or just copying other traders because they will not have to worry about which trades to take and when and why. If you are this type, I suggest that you start some learning. I was once this type and that also led me to copying other traders and later sourced out signals. I can’t say much about how it all ended, you can find out from this post HERE. I did pen it down. This type is also likely to just want to trust other people to trade for them, which is never a great idea in most cases. I believe that there is no one who can take care of your money better than you can.
This type of trader is up for variety, not only looking at trading currencies but CFD’s as well , like Gold spot, Dow Jones, FTSE 100, Dax, Nasdaq, BrntCrude Oil and many more. This type is the one that is “heads up” with what is happening as far as economic events, geopolitical, Central Banks and their Interest Rates and monetary statements are concerned. They are in the know when it comes to the fundamental reasons why the markets move. Any system that does not including reading and understanding the reasons why the markets move, will probably frustrate this type and it won’t make sense. I am definitely this type and I love being this type. It has saved me from from a lot.
This is the type of trader who prefers high frequency trading (HFT), and the risk appetite for this type is quite high. This type looks for higher gains due to an increased risk. Slow trading systems are too ”tame” for this type. They want to be there, hands on and prefer to do things on their own. This type is the one that sometimes fails to see the thin line between trading and gambling, they can easily gamble because trading high volumes is not an issue for these ones. Their eyes are only set on profits, driven by greed and the need to make it big, forgetting that what they can make reflects what can be lost as well.
Now that you can at least identify yourself and you can see which category best describes you, you can choose wisely and act rationally when taking trades instead of acting emotional. In closing, respect the market and it will return the favour. You may love to read this post about Forex trader Vs Forex gambler. That should also help you to identify your personality traits. Thank you for stopping. To help spread the tips, kindly share this post. If you would like to be notified whenever I publish a new post, you can subscribe to this blog. Look for the subscribe button on the sidebar, enter your email address. An email will be sent to your email address (it may be in the spam/junk folder) click on the link to confirm subscription. You can also download the App on Google Playstore for a quick read and weekly tips which are only posted on the App.
There’s a thin line between trading and just gambling
The statement above can be very true for many people. It was also very true for me too for so many years. It is very easy to adopt a gambler’s mentality when trading the financial markets, especially when you are expecting trading to be exciting and you are viewing it as some cash slot machine. How you view your trading account makes all the difference and has an impact in your performance. There are a number of contributing factors which may lead a Forex trader into becoming just one more gambler without even being aware. On this post, I want to focus on this one big factor listed below.
From the day a Forex trader decides to go from a demo to a live account, things change in so many ways. The trades that they do become emotion based instead of logic based. They become indecisive about so many things, like when to take profits, or when to cut the losses and whether to enter the market or not. If you start to feel like that, you have just discovered the effects of trading psychology. It is just a phase that is likely to pass if you really want it to pass. What you do after that, will determine whether you’ll succeed or you’ll become a gambler.
How does this affect your trading?
It actually clouds your judgement. There are two most important emotions that I am sure every trader has experienced in their trading career, these two are:
Fear can either cause you not to place a trade even when opportunities are plenty in the market, or it can make to you to close good running trades prematurely without giving them a chance to actually be profitable, and it can also cause you to hold on to a losing trade even when there is no hope for that particular trade, for the fear of being a loser. As long as one stays in the market, this emotion will at some point affect them. We all go through it at some stage of our trading journey or career.
The good news though is that it does get better with time. Actually, it does disappear completely. Think of the first time you had to be in the car driving alone and think of yourself now when driving alone. The fear that you had is no longer there. But if you stopped driving on that first day just because you became too scared and you ended up crashing your car, you would not be as experienced today. What made you become better was the fact that you never stopped driving and you faced your fears head on. That gave you strength to keep on trying and improving. You did not park your car and go back to public transport. It’s not just driving, there are so many other situations when you had fear and today you are a master in that area of your life simply because you did not give up.
Greed is the most dangerous zone, you don’t want to find yourself here. This emotion can cause you to take trades that are too risky with an aim to score big or to make massive profits in a short space of time or it can also be just about trying to appear clever and impress the crowd or even to be seen as the best. Greed can also make you to not close winning trades hoping that you can still make more out of them.
This emotion causes a trader never to be satisfied even when they make profits. They keep on holding on to a trade until they sometimes find themselves on the wrong side of the markets. When they are finally on the wrong side of the markets, they want to trade even more by opening more trades in the opposite direction to make up for a loss.
The good news again is that this emotion can be dealt with effectively as long as you are willing to put in the work that is needed. A good mentor/ coach is able to assist with such issues. I work together with my mentees to help them deal with these issues and I have had successful cases (but only where there was willingness and commitment from a mentee) Should you need private lessons, mentorship and coaching, you can enrol here.
Just like any other business whether online or offline, risk becomes part of it, but it should be a calculated risk because if it is not, it can eventually lead to the business closure. In closing, we can all be profitable traders as long as we understand that we never lose but learn, and we focus more on being consistent and getting it right because by getting it right, the profits start pouring eventually. Thank you for stopping by. If you find value in this post, kindly share with your peers and subscribe for weekly publications. You can also download the App on Google Playstore for a quick read and weekly tips which are only posted on the App.
Draw-down: A decline in an investment or fund. Let’s assume you start your account with $1000 and you lose about $100, that is a 10% draw-down (which is acceptable in my books, because you can recover it back). Being disciplined is one of the major challenges that many traders are faced with, but it is a skill that can be learned, but only if you are willing to learn.
Self control is something that should come from within, no amount of motivation or support can work if you are not doing your part. Traders need to understand that no matter how great the strategy or trading method is, if the emotions are not well checked, you are heading for trouble and a disaster is imminent. This is a very sensitive subject and not many traders are keen to talk about it.
It happens a lot, especially when you are still starting out, even seasoned traders do experience a draw-down. It is something normal, but it becomes abnormal when you cannot even figure out why you got your account into such a state in the first place. It then becomes very difficult to improve, especially if you do not keep a trading journal or even have a trading plan.
You had a very bad week and your confidence went out of the window. You feel so down and stupid, so ashamed and embarrassed, like you are such a loser and you think you need a break, maybe you do or maybe you don’t. There is absolutely nothing wrong with taking a break, but what exactly does taking a break mean? Does it mean walking away from your account and neglecting it without trying to figure out what you could be doing wrong or what could be the biggest contributor to your draw-down?
Trading is more about you than about a trading strategy
Most of the time, failing has nothing to do with your strategy or method of trading that you use, but a lot more to do with your emotions and your behaviour. A group of traders who are trading the exact same strategy can have different outcomes. I see this even with my own mentees, the outcomes aren’t the same. When you have lost more than 50% of your account’s equity, it is definitely time for you to take that break, evaluate yourself and work on your issues (if you have a coach, a good coach can help you with tools to sort out your issues but you have to be willing to do the work needed)
The problem is when you do not have a trading journal and you do not record your daily trades and the reasons behind them, it is almost impossible to recover and you won’t know what you did wrong, and therefore you won’t know what to fix. So while you are still reading here, check if your trading journal is in order (that’s if you have one), if you don’t have one, get it today and start writing In it from Monday and while you are still at it, also draft your own trading plan. If all these are really confusing for you, it is time you find yourself a coach (I can be one)
When is it a good break?
A good break means that you are going back to your demo account, you are decreasing the amount of money you are trading with by asking your broker to do a “withdrawal” for you on your demo to accommodate your new smaller equity on your live account. Get your trading journal in order, start writing In it right away. Do that for about a week and at the end of the first week, go back to review your daily trading activities and see if there are any mistakes you can pick up. Chances are, you will pick up some mistakes because you’ll be doing it with a sober mind, minus the emotions you get when you are trading live. Start fixing your mistakes on your demo account and see if you can improve or do better, chances are, you will improve and become a better trader. Gradually move back to your live account to get your emotions in check again. Start with a very small volume until you feel confident again.
When is it a bad break?
A bad break is when you walk away from your live account and you do not touch your demo account or even try to figure out what could have gone wrong and why you are in that situation in the first place. When you take a break, it is a bad break if you do nothing during that break. If you do that, chances are, you will go beyond a simple draw-down when you finally go back and you’ll head straight to a margin call (losing your account), because you will still come back with the same emotions and behaviour.
If you should know, a demo account is there to retest and retest. A trader is never too smart for a demo account. I used to do that all the time and it worked. That is how a trader becomes emotionally stable day by day and that is how you become rational. I hope you found this post informative. Thank you for stopping by, kindly share with your friends and if you need private coaching, you can check my course HERE.
Welcome back. I hope you are keeping safe and still holding up well under lock down circumstances. Please continue to look after yourself and your families. Wash & sanitise those hands, wear that uncomfortable mask and keep the social distancing rules, we will soon be fine. OK, today I want to share something regarding trading capital.
I always say that a person who can take care of his/her account by protecting its equity no matter how small the account is, can definitely do the same with a bigger account. I have seen this with my mentees when I coach them on smaller accounts, they develop a lot of patience which is a much needed skill in trading. A smaller account can teach you how to be more patient. It is the same patience that will carry you when you start trading a bigger account. If you start with a bigger capital before working on getting skills such as patience and being more disciplined, you are more likely to mess up and loose all the money. My favourite saying is “get a skill and get it right” then work on your capital when you’ve worked well on yourself and you’ve got it right. I’ve also published a blog post on how to grow a smaller account.
Undercapitalised myth or underdeveloped mindset?
It’s definitely a mindset issue. It might be true that with a bigger account, you can achieve more. The truth is, not everyone with a bigger account succeeds. I have seen people failing with enough trading capital and people getting it right with a smaller trading capital. What separates the two is the fact that the one with a bigger capital is likely to rely on the money and neglect all the principles and things like patience. A person who trades a bigger account as a beginner is also likely to think that the account is immune to margin call because the capital is bigger (which is definitely not true) succeeding with a bigger account requires more discipline.
If you feel like you are not yet disciplined and you are still struggling to overcome that (I’ll assume that a person who is aware of this, would want to work on it) rather start small even if you have enough money to start big, start small while you train yourself on such issues (I love coaching my mentees on such issues, having a mentor/coach to help you, makes it easier to overcome). I am sure you have heard the “if I had a bigger account I would have made it ’‘ excuse (I hear this all the time, even from my mentees) I am saying it’s an excuse because I know that succeeding in Forex trading requires a lot more than just capital.
A Perfect Example
A person who has a job would say only if they can get a promotion and earn a bit more, financial life will improve as well, but the opposite usually happens if that person has discipline issues. They start to increase spending and always running short of money, this particular person needs more discipline than more money. They aren’t undercapitalised but underdeveloped. It is the mindset and the discipline that is needed, not more money.
Now back to Forex trading, when a beginner trader wins, they feel brilliant and invincible, then start to take wild risks and trade larger volumes than what the account can handle. This type of behaviour leads to losing money. The capital is not an issue here but the behaviour is . I have come to understand that if you can handle $1000 trading account, you can also handle a $5000 account using the same mentality and discipline. You can also destroy a $5000 account as quickly as you would do with a $1000 or even $500, It is all in the mentality. If you can manage yourself, you can manage your finances.
Thank you for stopping by and reading this post. Thank you for your continuous support by sharing my content with more people who may need to improve their trading lives. For private lessons, mentorship & coaching, you can check detailed information HERE and WhatsApp me for instant chat (see WhatsApp feature at the far bottom right of this post).