Psychology in trading is the overall up and down of emotions that traders go through, while trading in any market. Forex traders are no different, except for the fact that here the stakes are quite high. Traders are calculative people, too busy studying the market and thinking about the next move to make profits. They have undercurrents of emotions running through them all the time. These however, get ignored, which consequently shows up in bad decisions, nervous breakdowns and an overall frantic phase for the traders before they suffer bouts of depression. This is the outcome of uncontrolled emotions, a topic on which, traders probably do not even think about.
Expert traders and veterans of the FX world are today increasingly stressing on emotion management. On the topic of importance of emotion management in trading, Kishore M, a Dubai based FX expert, and a Bitcoin day trader says, “Bad decisions aside, Forex trading gets emotionally draining too. A good day at Forex trading is a high, but bad day can pull a trader down a few notches. Fluctuating emotions and the mental stress of a trader’s life is a vicious cycle. If one does not learn how to stem these emotions and take a break, it will eventually send bad days into a spiral.”
The four major emotions that dominate traders are: Hope, Regret, Fear and Greed. Each of these emotions can give way to another in a matter of seconds and this where the undulating highs and lows come in.
One of the most felt emotions in the Forex market is Fear. It motivates a downward spiral but eggs traders on towards positive decisions too. There have been cases when fear has lead seasoned traders to take bad trading calls. On the other hand there have been instances when fear has lead to good calls and made profits for traders.
For instance, you hold a forex position of EUR/USD at 1.5000. You see the price currently at 1.4920. You panic and, in your fear, you end up closing the position, early. You don’t wait to see if the support holds. This would be a bad call. In your fear, without any fundamental analysis, you closed out. If, history repeats and the support holds, the prices will start climbing again.
However, if the prices fall further, and in your panic you took the decision to close early, you are saved from another loss. This could be pure luck or could be a good decision. In either case, fear numbed the trader enough to make him lose out on a effective decision and analysis.
Taking off from the previous instance, when the trader closes early and the price climbs, the natural feeling at this point in time would be regret. Rather than give into the feeling, a trader should take stock of what went wrong and analyze what could have gone right. One of the aspects of regret is that trader starts pursuing that currency will he lost on. It is called “chasing trades’ which spells doom for traders.
Emotional control is one aspect that needs to be looked at by each individual trader. Regret, is often the feeling that leads to wastage of time. So a trader may regret a missed opportunity, but he cannot spend time mulling over what he lost. The ideal way is to get up and look for the next opportunity, which can reverse the situation.
Greed is a vice which drives markets. Had this not been true, traders would have stopped trading after initial losses and the markets would have gone kaput. Greed sets high expectations, often unrealistic. It is Greed that leads a trader to pin hopes on a potential win, which is nothing more than a speculation of a potential win.
Hope is a dying man’s last prayer. In context of Forex traders, this is the emotion that keeps a trader in the game. Highly reviewed FX trader, Kishore M, has a word of wisdom to share with the new bees of the FX world. He says, “A positive trait by all means, in FX trading,A positive trait by all means, in FX trading hope can be a killer. A win encourages him to hope for better gains. Hope keeps him from closing and somewhere down the line, hope merges with greed.” Losses despair a trader, clouding one’s power to analyze and to think practically. What hope does is to make a winner, lose sometimes and a loser lose more. Call you shots. Understand when to stop hoping, because the charts will tell you when you need to stay put in the game or call it a close.
Four Emotions that rule a Trader’s life
Forex trading or any trading for that matter are driven by people at the core. None can deny emotions. Markets however do not work on emotions, not always. Occasions such as Christmas, or holidays are an exception when most are trading before taking a break for some time off. FX is volatile and every second the charts show movements, the probability of a game changer remain. Emotions rise and fall with price fluctuations and therefore the need to keep a strict check on them.