Every person is unique in himself and has different mental state and emotional aspects. Individual psychology in forex trading plays a crucial role. Taking care of these psychological aspects in trading is the second most important aspect. They influence one’s decision-making. One can never be a good trader until he controls his inner impulses. A new trader generally faces more psychological imbalances and personal biases, which are dreadful for successful trading. Objective analysis of technical and fundamental aspects, keeping personal biases aside, is the linchpin of one’s success or failure. Wrong risk management, fear of missing out, and greed are the most associated psychological behaviors with traders.
Here are some common psychological behaviors traders face and ways to control them to become successful traders.
1. Fear of Missing Out (FOMO)
FOMO is most associated with new and young traders. It is a condition where a trader thinks he is missing the opportunity of a good entry when the graph shows a dip or surge. Traders ignore technical and fundamental aspects and jump onto making a wrong entry, ending up losing money. This condition is created when the market is too volatile or a vital report is to come. This behavior slowly vanishes with experience; however, if one has prior knowledge, he can save himself from initial losses.
How to Overcome FOMO?
a. First and foremost, one has to accept that this is an actual condition. Recognition of the condition is the first step. Most new traders do not have any understanding of this condition at the beginning of their journey. So, if you face an urge to place an entry just by looking at the graph and ignoring your analytical results, you are facing FOMO.
b. Do not get over-motivated or influenced by other traders. Taking motivation from others is good, but getting over-motivated by the life stories of successful traders can have a harmful impact on your rationality. Young people try to get rich overnight, and over-motivation creates a sense of FOMO in them.
c. One of the most significant drawbacks of FOMO is that it forces new traders to make multiple entries when the trader has already made a wrong entry. Traders have already ignored technical and fundamental analyses and are making more entries with a false hope of loss recovery; this multiplies the loss of the trader.
2. Greed
We all have been listening to the famous proverb, “Greed is Curse.” You may not have experienced it in your life, but when you become a trader, you often experience it and regret it afterward. Human psychology is greedy by nature, and everybody wants more and more profit out of a trade or in a minimum time. Greed severely affects rationality and risk management and influences you to make high-risk trades. Greediness will affect you throughout your trading journey, and you will have to resort to lesser gains many times during your journey.
How to Overcome Greed?
a. One must have a clear target to achieve. Suppose you are a day trader, and your aim is 100 dollars a day; you must stick to it. You made an analysis to achieve your target, but your greed will influence you to hold the trade for some extra time for extra profits. Never hold it. If you want extra profits, set a higher target and work accordingly.
b. Focus on your trading technique; greed will influence you to get detracted from your set technique. If you are a day trader, strictly focus on your day trading. Do not try swing trading because you made an analysis for day trading, not for swing trading.
c. Remain consistent with your risk management technique. Do not make impulsive high-risk trades for extra profits. Greed overshadows your rationality to make high-risk trades. However, it should be highly discouraged.
3. Fear
Fear infuses an inverse effect on your trading. This stage comes after someone has lost some money already. He/she has now become extra cautious about starting trades. Although the reasons for his early losses can be either of the abovementioned, this time, the trader will start questioning his analysis. He will be hesitant to make an entry even if he finds a good entry point, ultimately losing a good opportunity. It may seem contradictory to FOMO, but in reality, every trader faces this behavior.
How to Overcome Fear?
a. As discussed above, it is quite a late stage, so if a trader has lost money at the initial stages, he needs to find out the exact reason for his loss and try to overcome that mistake. Rather than directly questioning your analysis, check whether you have been a victim of FOMO or greed, then make a decision.
b. Stick to your plans and your techniques; this is trading, and you can face profits as well as losses. A 70% success ratio is considered very good in trading. A 70% success ratio means you are making three wrong decisions out of 10. Remember, nobody can achieve a 100% success ratio; you need to maintain a 60% success ratio to gain profits.
c. If you have worked on your analysis skills, be confident. Look for long-term strategies. There are no shortcuts in trading. It is a process of learning and improving decision-making skills; just like other processes, it is also going to take time for improvement, so have faith and confidence in yourself.
4. Overconfidence
This is the one attribute that impacts not only your trading journey but also every other aspect of your life. An overconfident person does not realize his mistakes and keeps on repeating them. If you have the issue of overconfidence, you are going to face difficulties in every stage of your trading journey. Overconfident people tend to ignore inputs from other sources, which are very crucial for both technical and fundamental analysis.
How to Overcome Overconfidence in Trading?
a. Give respect to other’s opinions. If you are trading alone or especially in a group, you will come across many platforms for information and opinions for your analysis. Try to take that information and opinion rationally rather than rejecting it outright or accepting it irrationally. Assess the source of information/ opinion, keeping your biases aside.
b. Overconfident traders are more likely to make high-risk trades and excessive trading, so work on your risk management and your target and stick to them.
5. Emotional Trading
Emotional trading refers to the situation where traders make trades while experiencing strong emotions such as happiness, anger, anxiety, excitement, etc. Research has shown that when a person is emotionally charged, they tend to act irrationally and pay little attention to the consequences of their actions. Emotionally charged trades can result in significant losses. In fact, most trades made under such conditions end up in a loss. Therefore, it is advisable to avoid trading when you are not emotionally stable.
How to Control Emotional Trading?
a. Many part-time traders engage in trading during their free time. After a long and tiring day at work, individuals are often emotionally charged and unprepared for any unforeseen circumstances. If you are a full-time employee, it is important to refresh yourself before engaging in trading activities.
b. If you are having a bad day, whether at work or home, do not trade that day; give yourself time to relax a bit; your health is more important than trading.
c. Reserve a time for trading; you should feel relaxed in that time to focus maximum on your analysis. The importance of technical and fundamental analysis is known to every trader.
d. Do not trade late at night, especially if you are a full-time employee. Studies have shown that brain function is slowest during late night. Trading is not a 100m race; it is a marathon; you have to balance out each aspect to become a successful trader.
Bottom Line
The article discusses the crucial role of individual psychology in forex trading. It highlights the common psychological behaviors that traders face, including fear of missing out (FOMO), greed, fear, and overconfidence. It provides tips such as recognizing the condition, having clear targets, focusing on the trading technique, and sticking to the plans and techniques that will bring you success in your journey.
