Forex psychology is a crucial topic that many traders ignore due to a lack of knowledge. However, it has a significant impact on their trades. Trading psychology refers to the feelings and emotions that are encountered by a trader while trading. These emotions are usually a combination of positive and negative feelings. Therefore the trading psychology is considered to be a complex subject that requires a considerable amount of time to gain expertise. It is concerned with the mindset of a trader that he uses for emotions management, trading decisions, and thought process management. Having adequate knowledge and training of trading psychology helps traders get better outcomes of their trades and face few losses.
Importance of trading psychology:
Trading in a financial market such as stocks, commodities, Forex, or any other, traders are required to have some specific skills if they want to maximize their profits while minimizing the potential losses. They must have the latest market information along with trading experience and knowledge of trading psychology. The way traders manage their emotions to handle various situations during trading has a significant influence on the outcomes of their trades. It would not be wrong to say that the success of their trades significantly depends on their psychological management skills. Having the latest market information with knowledge of all useful tactics and techniques to be applied during trade would not produce desirable outcomes for you until you have adequate knowledge about how to keep your emotions under control and not let them affect your trading plan.
The most significant advantage of having sound trading psychology is that it increases the chances of making profits or at least reduces the risks of potential losses in the best forex trading platform. Sometimes eliminating loss becomes more important than earning profit for the traders. Moreover, traders are required to make quick decisions in many instances regarding the opening and closing of their trading positions. This decision can be taken better when they have a concentrated mind without the influence of any specific emotion such as anger or fear.
Some of the most significant psychological stimuli that a trader may encounter include fear, anger, greed, and impatience.
Influence of psychological stimuli:
Following is the influence of the four significant psychological stimuli encountered by a trader.
Fear may cause a trader to be reluctant to open new trading positions and resultantly may liquidate their trading funds all at once. Due to this, the trader may lose potential opportunities. This may be observed when a sudden and unexpected situation arises in the market, such as a market crash. A trader influenced by fear would only think about saving the cash by liquidating their funds and ignore all other factors. Fear makes him think that the best decision at that point is to turn their tradable assets into cash and hold it instead of investing in new trades.
Anger after a loss in the trade may result in rash decision-making by the trader. Irrationality arising from anger may also cause them to open trades in the most unfavorable situation that means when the market conditions are totally against them. They may open a lot of new trading positions In anger. When anger overwhelms the decision-making ability of traders, they tend to make a decision under its influence instead of basing their decision on facts and calculations.
When an impatient trader involves in trade and finds out that the actual payouts are smaller than their expectations, all they want is to go for larger payouts. For this, they may deposit huge amounts of funds in new trades and open bigger positions with anticipation of larger profits.
Greed arises when a trader receives a payout from trade and gets attracted to receive more payouts. In this situation, he cannot help himself from opening multiple new trading positions to receive even more payouts.
Impatience and greed are more related to the influence of an individual on the outer world and environment. They are therefore considered relatively positive. Traders experiencing these emotions want large amounts of profits within the least time possible. They find it difficult to wait or reach their goal by achieving smaller goals one by one. They just want everything at once, and this usually leads them to face the uncertain situation.
The above-mentioned psychological stimuli result in the deteriorated perception of traders regarding the actual market situation. When overwhelmed with these stimuli, traders cannot make out what is actually going on in the market.
How to overcome psychological stimuli:
For better management of these emotions, particularly and overall psychology in general, a trader must be equipped with adequate knowledge along with practices regarding their responses to different situations. This will also help them to remain calm and composed during uncertain behavior of the market.
Fear and anger are more related to the influence of the outer world and environment on a trader, and they are relatively more negative. This is a fact that every individual experience these two emotions in their lives, and therefore, it is nearly impossible to get rid of them completely. However, one can make efforts to reduce their impact on the decisions they make. It requires mental work and practice to learn to react to these emotions in a better way because these stimuli are inevitable and natural, so you cannot stop them from happening. However, you can learn to behave in the most suitable manner when any of these emotions get you. Firstly, traders must be aware of the factors that make them angry and afraid before they actually come across such a situation. This will help them plan their resultant behavior beforehand. For this, traders must be aware of the challenges of the trade that they are most probably expected to face and, with the help of mental exercise, plan their reaction to those situations. Planning beforehand helps in reducing the influence of psychological stimuli on behavior.
Greed and impatience arise from a positive outcome of the trade when the trader wants to have more of it. Most people enter forex trading with a misconception of getting rich overnight by just opening trades and collecting large payouts. They believe that after opening a trade position, they will be getting regular large payouts to increase their wealth and ultimately fulfilling their trading objective. However, the reality is against this misconception. Traders usually generate small payouts per trade and multiply them by applying smart trading tactics. The secret of becoming a successful forex trader is following smaller goals and doing things step by step. Traders must follow their trading plan instead of their instincts to yield better results.