Psychological aspects of Forex market trading – Guide to Forex Part 15

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The role of a mistake

Let’s say you wanted to create a model market, an place of exchange where all the players would have perfect, faultless knowledge and thinking. Do you know what would happen? Nothing would happen at all. The probable result achieved would be the equal exchange of one resource for another– in the case of a commodity exchange, for example. In order to have a speculative market (without the real commodities – in our case, currencies-being traded) that results in winners and losers, you actually need participants that will make the following mistakes:

  • sell cheaper than some reasonable price hoping to buy again at lower level
  • purchase at unreasonably expensive price hoping the market will continue to increase
  • start trading when the price is not changing
  • abandon a trading strategy
  • risk an excessive part of their capital

What all these mistakes have in common is one thing: an emotion that makes you listen to yourself and not the voice of reason. It is because somebody makes a mistake that exchange rates change and some other trader makes a profit as a result. A profitable bargain for you is always a disadvantageous one for someone else. That is if it’s money we are trading and not goods.

Using the metaphor of money as energy can shed some light here. The law of conservation of energy for a closed system says that energy cannot increase or decrease in total. It can change forms, but the total amount does not change. Similarly, money or currency does not increase or decrease in total. It changes forms, from USD to JPY, to Euros, etc. Governments sometimes even increase the amount of money they print, but this does not necessarily mean that the government has more money to spend–in fact, when a government does so, the value of their currency usually falls, keeping an equilibrium between the amount of money in circulation and the money’s actual value. If this balance of conservation between amount and value did not exist, you could merely print money and become rich!

Faultlessness

Sometimes it may seem like no one is experiencing losses. This is sometimes possible in a narrow group of individual market participants (private persons). It means that a mistake has been made by one of the big participants like a big commercial bank, investment fund or a private company. It may sound impossible but it isn’t. These financial institutions are managed by people, and people are emotional creatures. In addition, a trader can wait until a period of uncertainty is over to trade but banks always have to keep the game going and that automatically makes it more likely they will make mistakes.

If you want to have a consistent success in trading you have to block your emotions from influencing your decisions. This piece of advice sounds trivial but that is all you really have to know about the psychological aspects of trading. It doesn’t even matter whether it is a stock market or currency exchange. You can go and buy some books about the psychology of trading in order to check this statement. You will find that much of what is in these books is waffling and filler, by means of which the author simply wants to pad out his material in order to write a book to earn some money. The rest of these books may help you but in the end you will realize that their content was just this simple principle spread over hundreds of pages.

How to turn your emotions off?

Completely turning off one’s emotions is quite impossible. Humans simply have them and it is a indisputable truth. There is no use suppressing them as it may even do some harm to you psychological or physical health.

However, you can keep your speculations safe from emotions by following some tips and hints. Don’t be afraid, you will not have to lose your human nature! All you have to do is limit yourself with some strategic and money management rules by maintaining a fixed percentage of your deposited money for trading and not deviating from that rule. After that, you have to strictly follow your strategy. Even if you feel like breaking the rules “… just once to earn more money or save a losing situation …” you shouldn’t : you should do your best to follow the rules at all times.

What if you give up? Alexander Elder, a famous writer of books about stock market trading, compared losses in trading with alcoholism. Any trader can sometimes be allured by an attractive market situation like anyone can be by a glass of wine. But a chronically losing man is like an alcoholic, he is not able to stop. At first he might give up his strategy in order to try to earn more money, under the influence of greed, or else he might close a position too early because of fear. There then follow disordered and confused steps away from the strategy, and eventually the strategy simply disappears, just like a couple of glasses of his favorite drink.

Similarly, it is unwise to believe you are a completely unique person who can always bet against the market (or the “crowd”) successfully. Detachment is the key to success! It kills fear, greed, hassle and unawareness – all that could spoil your successful speculation. Detachment provides you with confidence, purposefulness, consistency and attentiveness – qualities that you need when trading. Foster detachment in yourself; it will help you not only in trading but in everyday life too.

Loss of health makes any wealth useless, so always remember to take some rest!

Start doing yoga exercises in order to train your body to relax. Tension accumulates nowhere but the body. Practice meditation. It will help you to start differentiating between your mind and body, desires and intentions, aims and objects of lust. In this way, you will get real independence from emotions. Develop your intellect: learn to play chess, solve problems in fields you are interested in, read books. Make yourself better in order to enjoy yourself and it will positively affect your trading.

Always treat yourself after successful trades, for high earnings and especially for following the strategy and maintaining the correct levels of risk. It would be better if you do it after every successful trade cycle. Your reward should bring you mental and physical satisfaction. It should positively affect your mood and motivation as our body and subconscious are trained reflexively by remembering and classifying situations in our memories. Our body is an animal. Just like any other animal it can be trained to obey by stick and carrot to control emotions. Regular rewarding (delicious food, sex, beautiful music, delicate aroma) of your “animal” part is just enough for it to learn not to bother you during your trading sessions. In time, your body will remember the necessary behaviors to stop interfering with you while you make trading decisions.

At last, don’t forget to relax, get some rest and give yourself periods of idleness. Take a walk in the park or have some time reading a good book or take a vacation to the Maldives (which are going to sink soon, so hurry up!). Of course trading may carry you away, but you should remember that health is much more precious than any profit you may gain. Loss of health makes any wealth useless, so always remember to take some rest.

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About Author

I am a forex analyst, trader and writer. I have had a career writing articles for websites and journals, starting in the travel sector and then in Forex. I use a combination of technical and fundamental analysis in my forecasting. When I joined Forex4you in 2010 I thought it was a great opportunity to work as an analyst for an international broker. I provide technical forecasts with clear entry points and targets as well as articles on fundamental and trading themes. Good luck and happy trading!