You might already know about the forces and factors that drive the forex market. Fundamental analysts assess the market situation and anticipate the potential price movements after considering these influential factors. However, the market sentiments are also a force that can cause sudden volatility and impact the currency pair prices. Market sentiments are based on the emotional bias and psychology of the majority of traders that are active at the moment.
When the market and significant pairs are in green, it’ll be considered a bullish sentiment. When the opposite happens, then that is called bearish sentiment. Several factors lead to bullish or bearish sentiment, and expert traders trade accordingly without having any bias. You should also see the charts and trade accordingly without assuming anything because assumptions, most of the time, go wrong and lead to losses.
To help you out, I have created this beginner’s guide to master trading psychology, which can prepare you to trade forex like a pro.
Meaning of Trading Psychology
Trading psychology is the behaviour, thoughts and actions carried out by a trader during the trading process. A trader undergoes different emotions that can affect his ability to think and act logically. Those who can master their trading psychology will have a better chance of being successful.
For instance, the fear that you feel before placing a trade is just your brain trying to protect you from financial loss which is perceived as a threat. You can overcome this fear by taking measures to manage the risk and telling your brain to calm down as you are only risking within your comfort zone. Greed is another common emotion that traders experience and this has to be managed by reminding yourself about the risk of losses.
Let’s see what else you can do to keep your emotions in check by incorporating trading psychology into your forex strategy.
● Follow A Well-defined Trading Plan
The chances of falling into the trap of your emotions will be higher when you don’t have a solid trading plan with predefined parameters. Having a rule-based trading system makes a huge difference to your trading experience as it forces you to become disciplined. So, devise a trading plan and set your trading goals with clarity. Then you have to fix your timeframe for trading based on your preferred trading style, currency pairs you have chosen to trade and risk appetite.
If you are not sure as to which trading style or time frame would suit you, then you can try different approaches in a demo account. You can easily create one on the MT4 or MT5 trading platform. These are most popular due to their user-friendliness and backtesting features that allow you to test your strategy with historical market data eliminating the risk. If you want to use some additional tools and features for executing advanced strategies, MT5 is a free platform that you can consider.
● Keep a Trading Journal
Many beginners don’t think that journaling is an important step while trying to build a successful trading career in the forex market. But you will soon realise that keeping track of your trading activities is essential to realise your trading goals over time. You can see the trading history on your account but you may not recollect the logic that you applied to execute the trade when you review it later. You may have entered the trade just to recover the loss you encountered in the previous trade.
This was an emotional decision and you can note such things down while journaling about your trading day regularly. This way, you won’t just evaluate the performance of your strategy but also your strengths and weaknesses as a trader. If you can identify the emotions that trigger you and lead to impulsiveness, you will be able to fix your bad trading habits. This also makes you more attuned to your emotions and you get better control over them.
● Don’t Forget to Take Breaks
It is not healthy to keep staring at the screen and watching the price charts all day long. But many traders do this as they want to find all the best trading opportunities. Beginners usually spend more time on technical analysis than seasoned traders as they are still not well-versed in pattern recognition and interpreting the market situation with precision. This is not a good habit as the risk of emotional trading increases when you become exhausted.
You should take breaks from trading even if you are not feeling tired. Because the possibility of overtrading is there when you keep looking for trading opportunities. Some beginners are too eager to earn huge profits that they want to place as many trades as they can within a short period. You may even force trades deviating from your strategy. So, take a break when the market is not favourable and stop trading for a while after a losing streak.
● Stay Focused
To keep your psychology on the right track while trading, make sure to stick to the process. Trade on your setups, cut your losses and exit profitable trades on time. Many traders can keep their trading psychology in check for a small period, but then, are carried away with one big profit or loss. Don’t make the same mistake, stick to your setups at all times to be profitable in the long run. Use different trading tools and calculators to analyse trades with precision, and you will end up making fewer mistakes.
Using tools like trading calculators can improve your concentration as you won’t spend a lot of time doing the calculations manually. You will get to see the values right away and there is no chance of manual errors unless you input incorrect data. You can practice stress management techniques to improve your focus and attention span. The key to maintaining focus is to stick to the process instead of worrying about the outcome.
● Accept The Losses & Learn From Them
Losses are not something to be afraid of when they are kept under control. Many traders became disappointed and depressed after encountering losses as they were not prepared to see anything other than profit. But, you must accept losses as a part of the game and learn from them. If possible, make a journal and note down all your trades and the reasons for taking them. This will help you become a better trader because you’ll know your strengths and mistakes. Keep practising in a demo account to consolidate your strengths and improve your mistakes.
Bottom Line
In the end, trading psychology is an important subject for a trader but it is also one of the toughest topics to cover as emotional control cannot be taught like technical analysis or fundamental analysis. There are some effective techniques and tools that you can use to manage your emotions as a trader. While using these tools. you have to make consistent and conscious efforts to master trading psychology and apply it in live trading. Incorporating trading psychology is essential to follow a professional approach.
