What is Forex Trading Psychology?
Forex trading psychology is the art of managing emotions when trading in the forex market. The success of your profits in the currency market does not rely on the knowledge and experience but emotional discipline.
Forex trading and psychology should be used almost simultaneously to avoid some of the costly mistakes financial traders repeat in the forex market. These failures are a common trend among people from different social backgrounds and culture.
The fight or flee that emanates from fear is a major weakness that leads to failures even among the most respected forex investors for so many years. Changing emotions that cushion us against some pains is not possible, but prudent and successful forex traders can change their response when such feelings are likely to influence thinking and reaction after trading.
Fear limits human thinking especially when it comes to trading because the mind uses it to find a soft landing to make sure you live for another day. Therefore, as a professional forex trader, analyses the fear and ask yourself if pulling out due to fear will sort your issues. Failure to harness and be in charge of your psychological outbursts can cause a diversion from an early planned trading strategy. Fear can also take you out of the winning ways because of the failure to focus on the long-term and opt out when the whole strategy was to keep you on the game to make profits.
You need to understand how forex trading psychology plays within the forex trading market. Knowledge of fear will give you more powers and keep your emotions above worries. Overriding fear as trader gives the power of logic to you, which should be the ultimate goal trading business.
Types of Trading Biases
Before the floor opens all traders and brokers are calm and collected until the clock starts to wind down. Emotions will come in when faced with a financial decision that needs an answer within a short time.
A dedicated trader should always try to be on top of feelings related to fear or greed when the floor is open as this helps avoid costly mistakes. Do a personal analysis of self and decide which one of these forex trading biases you are subject to:
- Overconfident: seems to know where the market trend is going
- Anchoring: trying to pre-empt possibilities, which could be right or wrong
- Confirmation: gives the impression of always getting it right
- Loss: giving yourself some hope that the market will rise again to help you regain your loss
All the above biases have one thing in common – FEAR.
The number one way of getting used to manipulating your fears is to get the demo account, familiarize with the live markets, and gauge how you control your reactions to the environment and circumstances when faced with quick decision-making moments.
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Here are some of the forex trading biases in details
1. Overconfidence Bias
Trading euphoria is common on trading floors because of the confused nature of humans crowded in one place looking for a solution. Our personal self-esteem elevates us to the point proving that we know what is happening around us and better than the next person is.
The only way to beat this is by owning up when you make mistakes and do not be afraid to be on the wrong. Once you have accepted that mistakes are inevitable when you are top of the learning curve.
2. Anchoring Bias
Traders want to believe that they are comfortable when performing market analysis by theorizing a future that will be the same as now. The tendency to anchor pushes the forex trader into making future decisions today. They do this without looking at the variation in market trends, and exchange rates leading to bad decisions using outdated data.
Once a trader feels comfortable, he will expose himself a little longer in a losing position without considering the changing factors. Always be ready to experiment on new things and strategies when one fails to avoid further loses.
3. Confirmation Bias
This bias affects the experienced and professional traders who will always be having a ready answer to support the decision they have made. Such traders will seek to justify anything as long as it carries their narrative. Confirmation bias leads to repeating the same trading mistakes.
You are likely to lose time and money by lingering for so long without challenging the brain to think of a better solution.
4. Loss Aversion Bias
When a trader takes an opportunity to evaluate their trading performance when making a decision between a lower leverage loss than a high leverage reward, fear takes charge and we lose big time.
Practically a trader will cut on profits when the earnings are still very low.
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Trading psychology and the profits generated
In case you have been asking ”How to change my trading psychology menace and improve my trading performance, write down all the trades you have taken and then check if were emotioanally-based trades.
Knowing how to develop a trading plan and sticking to it is one way of handling fear. Use your years of experience, knowledge, and ability to control your biases and you will be successful. Trial and error could end up to be the best teacher that helps to keep the FEAR at bay.
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