Forex trading is not something to take lightly. If you truly want to be successful at forex trading, you must be prepared to invest the time and hard work to acquire the three factors for success – knowledge, experience, and emotional control.
Some of the crucial psychology reason are as follows –
Fear is very important factor in trading physiology
Several types of fear arise often in the course of trading whether consciously or unconsciously, these emotional responses include:
- The fear of failure
- The fear of missing out on potential profits
- The fear of losing everything.
Fear will often save you if you act quickly when you see that you are wrong.
Having a great trading system and all of the technical and analytical tools for success in trading is not enough to be successful. a trader has to have the right mindset. This can only be accomplished by learning to control emotional responses when trading and in all trading situations.
An emotional response which can adversely affect a forex trader involves fear impeding the trader from taking action. This can be especially damaging if the trader has a losing position and finds themselves paralyzed while the market continues moving against them.
Another example of fear which arises during forex trading tends to happen after the trader has made a losing trade. Because of a lack of confidence caused by the previous losing trade, the forex trader might be too afraid to jump back in regardless of an opportunity to make back the money lost on the losing trade.Fear will also cause a person to exit a profitable position earlier than would be necessary. This reduces potential gains.The fear of loss makes up a imp component of the forex market’s mass psychology, and it can lead to major market panics as traders try to to get out of positions at almost any price.
Basically, if you can be disciplined and able to trade with a sound trading and money management system, fear and other emotions can easily be controlled. As long as you plan your trade and trade your plan, fear can usually be kept at a minimum in your forex trading.
Hope can be one of the most damaging market emotions to a forex trader’s success because hope can keep a forex trader into holding onto a losing position in the hopes that the market will come back.
The market has already proven the trader wrong, but hope makes them stick with the losing trade, often leading to damaging results for their trading portfolio.
In fact, the hopeful trader would be far more reasonable in fearing losing more money on a losing trade.
Nevertheless, hope can be used constructively by traders when they hope to make more money on a winning trade and therefore let their profits run on.
Like fear and hope, the emotion of greed is common throughout the forex market, and it basically is the excessive desire for more than you need.
Greed prompts you to act irrationally. For traders, this usually comes in the form of overleveraging, overtrading, chasing the markets, or holding on to forex trades you know you should’ve exited long ago.In many cases, greed can manifest in the common trading errors of overtrading and running winning trades into losers. When you think about it, greed is not that different from alcohol; it can make you act foolishly when you have too much in your system.
Greed can also cause a person to stay in a losing position beyond the time when an objective trading strategy would call for an exit. This obviously results in a larger loss which then ultimately exhausts your capital.
Most people do not have any idea of how greedy they really are until after they start trading. Having a clear profit taking component of your trading plan can help overcome this emotional obstacle to success
The emotion of excitement can often arise after a trader has made a winning trade.
At this point, the trader needs to remember in the heat of that excited moment, that their success in trading over the long run will be determined by how disciplined they are in following their trading plan. The boost to their confidence may lead them to think they can do no wrong, and that can be when the problems start.
Not only does the trader need to take their profits out of the market by liquidating the trade and realizing their profit, but they also need to stick to their trade plan in doing so.
Nevertheless, the elated trader may throw caution to the wind and disregard the profit taking portion of their trading plan. This can even have the unfortunate result of them frittering away the handsome profit they had originally seen on the trade.
Remember, you cannot take unrealized profits to the bank. Realizing profits in a disciplined way is an essential part of trading successfully.
Lack of Discipline
Lack of discipline leads to emotional trading and is another of the major reasons why most forex traders fail. Unfortunately, more often than not, a trader that loses discipline will eventually lose money as well.
Trading without discipline is like gambling. Such a gambler might get favoured with a long string of winners, only to gamble away all of their winnings and more before leaving the table. Of course, they had lots of opportunity to walk away with a profit, but they did not have the discipline to do so.In essence, any forex trader that wants to be in the business over the long term needs to think of their trading activities more as a business, than as a gambling game.(I have also wrote article in past about “treating trading as a business”)
Unrealistic Targets and Goals
Another reason why most forex traders fail is because they have established unrealistic targets and goals. Always remember that the trading goals and target should be realistic as per your trading plan and investments.
Having a solid trading plan and the discipline to follow it can minimize losers while maximizing winners. Once you’ve developed an objective trading strategy or system, you must follow it! In developing your system prior to your first trade, nothing is at risk. For this reason, you should be able to develop a trading strategy that is objective. Once you’ve started trading, risk and reward become reality and you can get carried away by your emotions.
Lack of Knowledge
Last not least the other factor for losing money in forex business is lack of knowledge Just as it is with any business, whether you are selling products or services, trading futures, or trading in the forex market, you need to know the business in order to be profitable. Never stop learning in this business.
The emotions of greed, fear, overconfidence and hope are some of the major reasons why most forex traders fail, with practice of discipline and dedication one can ache huge success in trading. Wish you all a very good future in trading and investing!
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Source: This article is originally posted by Dave Vivek of fxstreet.com. Click here for the original article.