Trading is a mental game, and the person you must defeat is not the market but yourself. Our trading judgments are influenced by psychological patterns that have developed over years or decades and can obstruct long-term profitability. The study of the mind, behavior, and behavior patterns is known as psychology. It is what drives us to act in specific ways and how we get over challenges that prevent us from moving forward.
When forex beginners first begin, they tend to concentrate on the charts. Charts, after all, are where the “action” occurs, with double bottoms, reversals, breakouts, and trends indicating significant gains.
Trading Discipline: The Key to Success
Trading discipline lays the groundwork for gains by offering a set of guidelines to adhere to that lessen the likelihood of self-inflicted losses. Rules enhance this behavior, so it doesn’t drive us crazy even though we are all human and prone to errors and miscalculations that no discipline can remove. However, it won’t completely eradicate greed and fear, the two strongest and most challenging to control trading emotions.
To lessen the influence of greed and fear, create a set of trading guidelines that must be adhered to strictly. The damaging behaviors we’re seeking to break make it harder to follow those rules than to write them down. Rules may be as basic as only trading once per day, or they can be complicated and multi-leveled, such as only initiating trades when an instrument, for instance:
- Rebounds from support.
- Follows a bullish breakout.
- It is verified by a bullish crossing in the MACD.
- Is rising RSI.
When the currency market doesn’t behave as you want it to, it may cause extreme rage and frustration. Trading out of resentment, trading in retaliation, and placing risky bets to ‘get back at the market’ are all dangerous and practical strategies to lose your trading cash. The main goal of rules is to prevent you from making decisions based on blindness, which is the most crucial step you can take to become profitable.
Simple Rules List
Here is a list of simple rules for forex speculators.
- I won’t put more than 2% of my cash at risk in a transaction. (Using a percentage rather than a set sum enables the transaction size to increase or decrease in accordance with the account’s balance to maximize earnings and minimize losses.)
- “I’ll always go with the trend while trading. Price action, trend-lines, moving averages, and momentum indicators will be used to help me identify trends.
- “Only verified long and short entry signals will I enter. My signs include a breakthrough or collapse of the 50-period moving average and bullish or bearish crossings in relative strength and momentum indicators.
- If price movement is within 3% of resistance for a buy trade or 3% of support for a sell (short) transaction, I will not engage.
- “As exit objectives, I’ll employ support and resistance. I’ll sell to make a profit when the price hits my exit point. (Some gains are more rewarding than losses and better than no profits.)
- “At no point will I have more than one transaction open on a single asset.”
- “I won’t risk more than 5% of my account money at once or have more than five transactions active.”
- “I always abide by my guidelines.”
- The last rule is the most crucial of all. The existence of rules is meaningless if they are not adhered to.
Unfavorable psychological aspects
The leading causes of traders’ losses are listed in the list below. Particular restrictions must be implemented to prevent the detrimental effects of these often unconscious emotions. Better judgments, more consistent victories, and capital preservation will automatically follow when emotions are removed from the mix.
One of the most destructive emotions on the market is fear. Fear may prevent you from making a wise investment or from realizing a timely return. You’ll worry yourself to sleep at night, but don’t allow that to prevent you from trading. The answer is to keep transaction sizes short enough that one loss won’t be too devastating, and you’ll still have money to trade.
Although greed is just as harmful as fear, it is harder to see since it produces favorable emotions. The opposite of fear is greed. Greed is the urge to make large transactions and grab even more significant gains or the fear of losing earnings you don’t have. When things are going well, greed sneaks up and surprises most of us. In its most prevalent form, earnings inspire confidence above the level of existing experience, arousing greed that promotes excessive leverage and overly aggressive trading.
Ambition is a necessary quality for long-term success, but if unchecked, it may become a noose around a trader’s neck. As much raw desire (and adrenaline) as it takes to thrive in the financial markets, ambition becomes a threat to life when it leads to poor choices. Runaway ambition is best shown by comparing outcomes to another trader’s performance and allowing it to affect your choices.
Losses may be controlled by rules and discipline and are an unavoidable trading element. The objective is to accept “acceptable” losses while preventing catastrophic losses that might destroy a career. Position size is essential to losing control (2 percent rule), as is resisting the urge to lose money out of blind greed or fear. If you get irritated after a succession of failures, leave.
When the “ticker tape” goes against you, hope also turns against you. It makes reasonable to expect that your efforts will pay off, but when you ‘hope’ a transaction will pay off the house, purchase a vacation, or rescue your marriage, the train derails. That is “gambling” rather than trading, which is a sure way to blow your trading account and leave the forex market.
Summary
To be successful in the forex market, one must learn to control negative psychological qualities and how they affect trading choices. To put it clearly, making decisions in the currency market must be done without using emotions. That takes clear guidelines, the discipline to adhere to them, and the flexibility to leave when things start awry.