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Trader Psychology - Module 6

Welcome to this unit on Trader Psychology. In this module we will be explaining how trader psychology can impact the Forex market as well as your own personal performance whilst trading.

Key Learning Outcomes:

- You will understand how trader psychology can affect the financial markets as well as your own personal trading performance.

- You will learn about the various emotions that are likely to be involved when trading the financial markets.

- To understand the top reasons as to why people fail in this industry.

- You will learn the various ways in which you can look to manage your psychology when trading the Forex market.

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Trader Psychology

It is argued by many successful traders that the concept of trader psychology can be one of the most difficult and challenging areas to master when first learning how to trade.

There are two types of psychology to be aware of when trading the financial markets:

Key Market Participants Individual / Personal

Some aspects of trader psychology such as the key emotions of greed and fear have a large influence on why price either rises of falls.

For example, when price breaks a key resistance level the emotion of greed may take over resulting in mass buying, therefore causing price to rise in value.

In contrast, should price break a key support level the emotion of fear may result in panic selling, causing the value of a currency pair to decrease.

These types of emotions do not only drive the movement seen in the Forex market, but they can also affect how individuals themselves trade, and managing these emotions is a key aspect of trading

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There are both negative and positive emotions that you are likely to feel when trading the financial markets and understanding how these emotions effect your trading performance can be key to your long term success.

Positive emotions derived from success, such as confidence, can potentially have a positive impact, however, it may lead to arrogance resulting in traders taking unnecessary risks.

Negative emotions derived from a series of losses, such as anger and annoyance, may also impact a traders decision-making when placing trades and ultimately profitability. Therefore, being aware of and managing these emotions is a key aspect of trading the financial markets.

Reasons Why Traders Fail

Let’s now discuss some of the reasons as to why people may fail when trading the financial markets.

- Unrealistic Goals

Many people when they are first beginning to trade Forex have unrealistic goals in regards to what they can achieve in a relatively short space of time.

It is considered important to have clear and achievable goals from which you can then measure your success.

Unrealistic goals that are almost impossible to achieve may lead to disappointment and frustration, both of which may impact a trader’s performance.

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- Lack of Training

Another common reason as to why many people fail to succeed as independent traders is a lack of training.

This includes not having a clearly defined trading strategy and money management policy.

Many new traders may buy or sell a currency pair at a random level often without a clear educated reason for doing so.

- Inconsistency

Inconsistency in regards to constantly changing strategies and risking differing amounts per trade is another common reason as to why people can fail when trading.

By approaching each trade in an inconsistent manner, the results from these trades are likely to also be random.

- Low Commitment

Another potential reason as to why a trader may fail is a lack of commitment and discipline.

Choosing to trade on random days of the week may result in traders missing opportunities.

Also a lack of belief in the concept of trading and strategies, can also have an impact on whether a trader succeeds or fails.

- Emotional Control

A lack of emotional control is another key factor which may determine whether a trader succeeds or not. Traders prone to overconfidence are more likely to take unnecessary risks, whilst conversely a fear of losing money can mean that not enough risks are taken.

By being aware of and managing these emotions, traders can increase their chances of controlling how their state of mind affects their success when trading.

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How To Manage Your Psychology

Let’s now discuss some of the ways in which traders can look to manage their psychology when trading the financial markets.

- Having a clearly defined strategy or process that’s implemented on every trade is an important aspect to consider when trading. This ensures that in any scenario or stage within a trade, there is a clear call to action or process which removes the element of doubt that may occur.

- By implementing a strict money management policy on every trade, it allows traders to limit their risk as well as maximise profits. By doing this it can reassure traders of how to over come the problems of risking too much and help gain consistent results over a period of time

- It is also important to set realistic goals from the outset and so by achieving these realistic targets, traders can begin to improve and grow as a trader without becoming disappointed or frustrated at not being able to achieve unrealistic goals.

- Another key aspect of managing your psychology is to be prepared to have losing trades. It is unrealistic to assume that every trade you place will be profitable and those that are not should not impact upon your emotions and psychological state.

- It is important to be patient and disciplined when first beginning to trade the Forex market. By doing so you will be able to gain experience and confidence in your knowledge as well as be able to better manage the emotions involved when trading the financial markets.

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Trader Psychology - Summary

- Trader psychology plays a large role in the Forex market and the resulting emotions are part of what drives price up or down.

- There are various emotions that you are likely to feel when trading, which can directly impact your performance and profitability.

- Some of the reasons as to why traders may fail in this industry including a lack or training, low commitment and inconsistency when trading the financial markets.

- There are various ways in which financial traders can look to manage their psychology, including ensuring patience when trading as well as having a clearly defined strategy or process.