The Biggest Mental Challenges when Trading Forex
Updated: May 10, 2020
To trade Forex successfully, at first you have to master your own Forex trading psychology.
There are many characteristics that make a successful trader, but those who have the ability to monitor their habits and tendencies stand a far greater chance of improving other key areas of performance.
Changing your own psychology is simply a question of self-awareness.
By learning how your brain is wired to react to different scenarios, you can dramatically improve your ability to make the correct decisions when it comes to Forex trading.
Here are the three biggest psychological challenges traders need to monitor:
Recent Bias in Forex Trading:
Recency bias is when Forex traders become influenced by the most recent Forex trading results, without considering the bigger picture.
What if after a particularly pleasing run of results, your most recent trades lose? Does this mean your whole Forex trading strategy is failing? Of course not – the long-term strategy is still overwhelmingly positive.
But these losses can cause traders to doubt their approach and affect whether or not they can generate consistent profits from the market. Self-doubt leads to rushed and costly decisions.
The way to overcome this problem is to keep a detailed record of your trades. Look at the hard evidence from your last ten trades and amend your strategy from there.
You are bound to feel disappointed if your last trade didn’t work out the way you wanted it to. But if your trades are generally profitable, it’s necessary to put these negative outcomes into perspective.
Luck and Greed:
Luck and greed is a dangerous combination when it comes to Forex trading.
As frustrating as it may seem, some traders take some incredible risks that make them rich in a very short space of time.
But this risk taking mindset will lead to failure over the long-term. Luck always runs out on the FX markets, but greed can stick around for much longer.
Traders who implement high-risk techniques can fall into the trap of believing in their own ability and bravery. Unfortunately, this sort of thinking has led to many FX traders becoming broke when a high-risk trade fails.
If you’ve made profit from a risky trade, be wise enough to accept that you were lucky. Invest your profits into developing a conservative long-term trading strategy that will bring you low-risk and reliable profits.
Fear is a psychological challenge that all Forex traders face.
It comes from many situations, but if left unchecked, fear can be the thing that stops a trader from progressing.
As paradoxical as it sounds, fear usually comes when a trader is ready to increase the amount of money they trade on the FX market (something that is necessary to make substantial profits). The cash value figures can appear daunting and the natural reaction of an inexperienced trader is to become overly cautious and pass upon profitable trades.
It’s a delicate balance, but if you’re feeling fear it can actually be a good indicator that you have the right characteristics to be successful. It will mean that you are likely to think carefully about your trades and have a low-risk mindset: all key traits of a good FX trader.
The trick is to not let fear paralyze you into inaction. Make your judgement on the hard evidence and have the courage to pursue a trade if you have calculated that it has a strong chance of success.
Regularly check how you are thinking about your trades and strategy. Look out for any habits and tendencies that push you into a spiral of negative mindsets.
Addressing the psychological challenges that hold you back is often enough to remind you to take a step back. Trust in your ability and make considered decisions based on nothing but the facts.