Becoming a successful forex trader doesn’t just mean improving your technical skill; it relies on a deeper understanding of yourself and taking the initiative to improve.
Traders rely heavily on their own judgement. But they also need to rely on their own motivation and self-control.
In this article, we break down the characteristics and skills every forex trader needs to grow and thrive, as well as offering advice on how to calmly avoid making bad choices.
What is psychology in a forex context?
Newcomers to the world of forex can expect excitement, a steep learning curve, and a few educated guesses along the way. As money is involved, emotions are heightened.
If you’ve ever studied economics, you might know that market agents have to be simplified before they can be called ‘rational actors’. Human psychology is complex and most people are far from rational most of the time, especially when the stakes are high. Studies have shown that most people are in fact less rational than they believe themselves to be.
That tendency - to be emotional, make impulsive decisions, or make choices based on feelings rather than facts - is why understanding psychology is key for forex traders.
The anticipation of making (or losing) money creates pressured situations that affect the mind in different ways. The important part is understanding the effects that they have and learning self-control.
Understanding your own mind
Everyone reacts differently to different scenarios. But understanding how you react when emotions get heated is key.
Some self-reflection is necessary. Are you a cool-headed person? Do you tend to act impulsively? Does winning make you overconfident? Does losing get you down for days?
People often say to ‘go with your gut’. When it comes to forex trading, that advice only applies if you have all the information, you’ve done the research and you’ve identified an opportunity.
In short, for most traders, initiative is far more important than instinct.
In forex trading, taking the initiative means understanding both yourself and the market. Take a careful look at the facts and only act once you have them.
If in doubt, hold off for a while. Remember that patience and perseverance are key. Knee-jerk reactions don’t typically return the best results.
5 forex psychology top tips
Here are our top tips to help you make the most out of every trading day.
- Have a plan. Set a profit target that’s acceptable and stick to it. Your success as a trader will be determined by your ability to keep a cool head, and by sticking to a realistic target over the long term.
- Watch out for greed. Don’t hold onto a position for too long out of desperation to push your gains further.
There will be other trading days - don’t let your greed dictate your moves. Your actions should be dictated by clear logic.
- Be aware of the emotion and adrenaline when they hit. When you feel your pulse rate increase, take a breath and take a mental step back. Assess the charts and make a calculated decision on your next move.
- Take a break. It’s easy to get caught up in the trading day, sitting for hours in front of the screen.
While pro traders make it look easy trading for long periods, it’s wise to take time out, clear your head and come back ready to make quicker decisions.
- Keep track of how you’re progressing. Take an honest look at how well you’re doing and how far you’ve come. Are you developing better control? Are you keeping a cooler head? Are you taking the time to step back once in a while?
Acknowledge your progress and give yourself time. Take a look at your win/loss ratio and reflect on your journey so far.
For every trader, developing initiative takes time. So take a measured approach and base your decision on the evidence in front of you.