10 Dec 2021

Forex Psychology: The Ego

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If you’re a new forex trader, chances are you’ll have wondered about the pros’ secrets to success. You’ll have wondered whether you’ve picked the right trading strategy, timed the market, spot market trends, and also how intuitive you are.

While it’s true that while every good trader has some combination of these things, they also have one extra key ingredient: the ability to control their egos.

The ability to stay humble, grounded and focused on your trades (even when you’re winning big) is probably one of the most important factors in your long-term success as a forex trader.

What is the ego?

Essentially, our ego is how we feel about ourselves and our abilities at any point in time. Throughout our lives, our egos are influenced by different things – social situations, relationships, work, achievements and more. The more positive feedback from the world we get, the bigger our egos tend to become.

For forex traders, a big influence on their ego is how well trades are performing. An excellent few days’ profits, a trade that suddenly starts making money out of nowhere, a sudden market swing that reverses losses, all of these are big ego fuel.

While it’s natural to feel excited, proud and more confident when events like these happen, it’s easy to become overconfident as a result. For traders, overconfidence (that is: having a big ego) is a dangerous thing.

Understanding overconfidence

Human beings are naturally self-focused creatures. We like positive feedback, and our egos want to be validated. The problem is that good feedback can lead to what is known as ‘overconfidence bias’. It’s not uncommon for traders on a winning streak to believe that they are incapable of making mistakes. They believe that all the decisions they make are the correct ones – and will continue to be in future.

Overconfidence makes us lose sight of our true abilities and how much control over a given situation (or trade) we have. Of course, this type of approach is bound to end in failure over the long term. It leads us to lose sight of reality, our true abilities, and – most importantly – our core trading strategy.

How to control your ego and become a better trader

Traders who make consistent profits share a number of important characteristics. All of those characteristics are related to clear thinking, non-emotional decision making and – most importantly – an ego that’s kept in check. The best traders are very clear-headed both about the market and about their own abilities to profit from it.

Characteristics of successful forex traders

 

  1. They are comfortable with taking risks – and know that risks can lead to losses, as well as profits. They understand and accept that losing trades are simply part of the process.
  2. They adapt fast. Even after a successful run, they don’t hold too tightly to a fixed idea of the market’s future path. They are humble enough to change their view on future price movements if current price action shows they should.
  3. They are disciplined. The best traders can look at the market objectively, calmly and rationally, regardless of how current market action is affecting their account balance.
  4. They don’t give in to emotional swings. Losses do not overly upset the best traders, nor do they become overconfident. Winning traders control their emotions rather than letting their emotions control them.
  5. They make strict money management rules and stick to them. Successful traders are not reckless gamblers.

The path to success

Forex trading is difficult to master. It takes time and patience, and requires self-mastery. Having the correct psychological mindset for winning trades requires a lot of humility, self-control and self-discipline. Managing to keep your ego in check is just one of the many factors involved – but it is a crucial one.

Spend some time learning ego control. It can be difficult at times, but it will set you up for forex trading success in the long term.

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