A Detailed Look into Psychology in Forex Trading

 

A recent study by the European Securities Markets Authority (ESMA) said that more than 80% of new traders fail. This is a worrying statistic given the huge potential that trading in the financial market has.

There are several reasons why new traders fail. They include: the lack of knowledge about forex, bad luck, lack of a good strategy, and the psychological reasons.


The latter reason is often ignored by many traders.

They spend much of their time reading the technical and fundamental skills but ignore the soft-skills that are important in forex trading. In this article, I will explain a few things about trading psychology and why it should matter to you.

 

In all careers, the psychological well-being of the professional is very important. A teacher who is disturbed emotionally will not be effective in class while a mentally disturbed airline pilot will be prone to causing accidents. A stressed doctor will not provide the necessary treatment to his patient.

Similarly, a trader who is not doing well mentally will not perform well. For example, if you are going through a difficult breakup, chances are that you will be spending a lot of time thinking about it. This will make it difficult for you to conduct adequate analysis that is important for your trading. The same is true if you have huge outstanding debts or if you have just lost a loved one. Therefore, before you start trading, you should always ensure that you are doing well emotionally.

 

Another way to look at psychology in trading is how you deal with losses. The financial market always moves up and down and traders always lose money. This includes the best traders in the world. The challenge is how you deal with your losing trades.

 

For example, if you lose 15% of your account, how would you react? Since these types of losses do happen, you should be at a good position to move on without exposing yourself to risks.

 

A common mistake people do is to open an opposite trade after making a big loss. For example, if the EUR/USD pair is trading at 1.1200, you can placed a long trade expecting it to move to 1.1250. If the trade goes down and reaches a low of 1.1160, you can be tempted to end it and open an opposite trade. Since you will open such a trade without doing any analysis, chances are that you will end up losing money.

 

There are a few ways of preventing this scenario. First, you should always use a low leverage ratio. This will help you reduce the amounts of losses you are exposed to. Second, you should calculate your risk tolerance ratio. After this, you should place a stop loss at the risk tolerance level. For example, if you have a $10,000 account and your tolerance ratio is a third, you should place the stop loss at the $300. This means that you will be comfortable to lose $300 per trade. Third, you should ensure that trading does not dominate your life. By this I mean that you should always have your free time to reflect, read, watch, play, and hang out with your family. Being active will help you improve your trading and ease your pressure when trading.

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