Aside from the technical complexities, many struggling traders battle with the substantial behavioral side of trading forex. It’s known that humans are emotional living beings.
Much of the trading literature continually suggests psychology as one of the critical ingredients for traders to make consistent profits and maintain sustainable careers. However, which feelings specifically are the downfall of many traders?
Of all the myriad of emotions any trader can experience at any time, greed, fear, hope, and regret are easily the most prevalent and detrimental. This article will explore these in more detail, with examples of how they typically manifest and how traders should avoid them altogether.
Everyone knows greed is the selfishly intense desire for something, particularly that of money or wealth. The concept of greed in all financial markets has been referenced and quoted frequently. It is an interesting yet detrimental emotion in forex and manifests itself in numerous ways.
Broadly speaking, greed plays out through irresponsible money management. One of the biggest mistakes committed by losing traders is risking too much in one or a few positions. Most come into the markets with unrealistic expectations of how much profit they could realize in the shortest time possible.
Greed easily and quickly blows out thousands of trading accounts. Below are other examples of this emotion at play:
- Scaling in too much or adding to positions unnecessarily: This technique can significantly increase profits in a short span. However, most traders who get it wrong have no logical place to add positions or a solid plan to manage the risks.
- Confusing open profit with secured profit: Many traders assume a position in some profit as money in the bank, causing them to make common mistakes like moving the target further away, adding onto the trade illogically, etc.
These are some of the methods of negating greed:
- Having realistic expectations about how much profit one could make in relation to their trading capital: A successful trader will strike a balance between trying to maximize their gain potential while also fully managing the downsides. They will also not have unrealistic profit targets based on their trading strategy.
- The proper risk or money management should be at the front of the trader’s mind.
- Open profit is different from secured profit. A trader should not get excited over a position that’s in gain.
Fear is an intriguing emotion in that it’s both positive and negative, unlike all the others, which are mostly unfavorable. In all life situations, fear is one of our survival mechanisms. Having fear provides invaluable advantages linked to reducing greed and overconfidence.
For instance, being fearful of losing money induces responsibility, causing a trader to use stop losses, risk a consistent amount per trade, appreciate the uncertainty of forex, and just prioritize money management over everything else.
However, fear is a huge dilemma, particularly in the following instances:
- Recency bias: This bias is a cognitive phenomenon where traders place too much emphasis on recent events. For instance, someone who has lost one or two positions consecutively is likely to assume their next position will produce the same outcome.
- Analysis paralysis: This occurrence is when traders over-analyze or overthink a trading decision to the point of not acting upon it due to the fear of losing money. Like anything else, it’s about striking a balance and embracing fear.
- Every moment in the markets is unique from the previous one; whatever happened in the past is technically irrelevant. A profitable trader measures their performance over an extended series of positions and never puts any significance on an individual trade or a few trades.
- Most traders who overthink a trading decision seek perfection. In reality, no trade is ever perfect. There will always be room for error.
As one of the most acclaimed trading psychology coaches, Brett Steenbarger, has said, “Confidence isn’t the absence of fear; it’s the knowledge that you can perform your best in the face of stress and uncertainty.”
To laypeople, hope is a beneficial sentiment to possess with most things in life. In a weird way, hope is counter-productive in trading forex and rarely gets spoken of enough compared to fear and greed. Hope is pretty much linked to greed as it also involves the strong desire for something to happen.
It’s only natural for anyone to wish for a favorable outcome to their positions. However, when traders use a ‘fingers crossed’ approach to hope, they tend to make several critical flaws like not employing a stop loss, especially after risking too much on a trade.
This emotion also manifests itself when traders take a position based on a hunch or educated guess without having established any thoughtful reasons for formulating a trade in the first place.
The simple fix for this challenge is maintaining an optimistic and confident mindset based on consistently performing over the long haul.
No one has a high level of certainty on where price will go in any given period. The key is to have confidence in the probability one’s analysis will work out in their favor and ensure they are comfortable with the downside and the potential of losing.
Regret happens in a few different ways, mainly when someone has missed a trading opportunity they should have taken or not making as much profit as desired. Feeling this way boils down to fear and not sticking to a trading plan. Often, traders will play out various ‘what if’ scenarios in their minds when they aren’t content with the outcomes of their trades.
The simplest way to minimize the feeling of regret is appreciating markets never stop moving, and new opportunities are just around the corner. Having this feeling results in a lack of patience as traders can enter a trade at an unfavorable level due to price-chasing. It can even cause revenge trading after a loss.
While post-trade analysis is essential for journaling purposes, many traders dwell too much on the past without understanding every moment in the market is distinctly unique. Even though we look for patterns, none of them play out in exactly the same way each time.
Hopefully, readers will notice the interesting relationships between all four of these emotions and how, when combined, they cause traders to commit several irreversible errors of judgment in their trading.
For instance, traders can feel regretful after missing an entry due to fear or feel regret after a massive losing trade because they were greedy. Essentially, emotions are interconnected. Mastering trading psychology is about getting to grips with certain feelings and finding ways to mitigate their adverse impact on trading performance.