Psychology is an extremely important yet often overlooked aspect of forex trading. New traders tend to focus entirely on strategy, but a good strategy is useless if you don’t have the discipline to stick to it. In this article we will discuss some of the psychological pitfalls new traders face on their trading journey.
I’m going to become a millionaire through forex trading (greed)
Greed is by far the biggest emotional problem new traders come across and it is also the bane of many a new trader. Sure, you can make millions trading forex and will if you put in the time and effort, but it’s not going to happen overnight. Setting realistic expectations and profit goals can go a long way towards helping traders overcome this infamous pitfall.
If you are trying to double your balance every month (or every week!), chances are you are just going to lose your balance. The worst part is, you will probably double your balance a few times before you lose and that will make the inevitable major loss all the more painful! The key to successful, sustainable and profitable forex trading is sound risk management and realistic expectations. Remember, your bank is only paying you 3% interest and you’d be very lucky to get 15% in a year with a professional fund.
If I just increase my trade size on this next trade, I’ll be back in front (chasing losses in forex trading)
Sure, but if this next trade is a loser too, you are going to be even further behind. If you want to gamble a martingale system, go to the casino and play roulette. If black comes up 8 times in a row you are going to lose everything though. Good trading is investing, not gambling.
Keeping a cool head and sticking to your money management rules during a losing period can be incredibly tough, but as long as you stick to your winning strategy, it’s actually impossible to lose. Think about it, if you are only ever risking 2% per trade, you can never lose your entire balance, as you are only ever risking a small portion of it. Having faith in yourself and your winning strategy will always pay off in the end. Ride out the hard times and the good times will soon return.
It’s going up! (protecting your profits in forex trading)
Successful trading isn’t just about picking the right trades, it’s also about what you do with those trades once you’re in them. Once you are in a profitable trade, there are a range of things you can do to ensure that winning trade doesn’t turn into a loser. Sure, the currency you’re trading is roaring right now, it may even have just broken out, but when reversals do come, they tend to be quite violent. Having a solid trade management plan in place will let you hold on to winners comfortably and make sure you at least bank a little profit if the market has a surprise in store. Breakeven stops, trailing stops and taking partials are just some of the ways you can protect your account, allowing you to have your cake and eat it too!
Source: Vantage FX Blog