According to world-renowned forex trader Justin Bennett, successful forex trading is 80% psychology and 20% mechanics. Once you acknowledge that the mental attributes required to prevail in the world of trading forex are crucial to mastering the markets, you are four-fifths of the way to winning the battle.
There are many instances of budding forex traders that have the technical aptitude for the markets. They can read the markets and pinpoint key areas of support and resistance, but they are unable to keep their emotions in check. The reality is that there are four psychological factors that can influence the decisions you make in the markets – emotions and moods, personality traits, behavioural biases and underlying social pressures that can change an individual’s attitudes and values.
Within this quartet of psychological factors lies a few key pitfalls the majority of losing forex traders fall into when entering the markets.
Source: Pixabay
Being driven by greed
Make no mistake, the forex markets are some of, if not the most, lucrative on the planet. Forex trading, which is the trading of one fiat currency against another, attracts average daily trading volumes of $5 trillion. It’s easy to see that there is money to be made in the markets, providing you know how to execute good trading positions.
Where so many losing forex traders go wrong is focusing squarely on their desire to get rich quick. It’s important not to look at forex trading or financial trading of any other kind as a ‘get rich quick’ scheme. Forex trading, in particular, is a small margin game. You don’t generate double-digit returns on a single trade very often, if ever. People wanting to generate those kinds of returns tend to over-stake and risk too much of their bankroll on each trade, increasing their chances of going bust.
The fear of missing out
Source: Pixabay
The general feeling of fear is triggered in the limbic system of our brains as a natural defence mechanism. According to Joseph Troncale, it is considerably more powerful than we credit it to be, particularly when it comes to the forex markets. The fear of missing out on a forex trade is particularly prevalent among day traders that seek to make daily returns from the markets.
The fear of missing out can be driven by various emotive factors in forex. These include going on long winning streaks with trades, as well as long losing streaks. During lengthy winning streaks, FOMO traders will feel invincible and demonstrate over-confidence, while those on a losing streak will take risky entries into the markets to try and chase their losses.
The desire to make correct decisions – 100% of the time
Last but by no means least, our brain is trained to make safe and sensible decisions all of the time. Some forex traders will have a stop loss for each of their trades as well as a take-profit point. However, many losing forex traders will take a smaller loss to avoid hitting their stop loss, only to watch their trade eventually move north into a green (profitable) position.
Additionally, some forex traders will also continue moving their stop loss to avoid closing their open position and having a losing trade, which can be a road to ruin if the open position continues moving against them.
Eliminating the emotional pitfalls of forex trading is only achieved through experience, confidence and sticking to your trading plan. Embracing and accepting the element of risk in every trade you do is vital, as is the need to understand the fundamental and technical forces that cause currencies to move up and down.
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Editors’ Picks
EUR/USD looks sidelined around 1.1850
EUR/USD remains on the back foot, extending its bearish tone and sliding towards the 1.1850 area to print fresh daily lows on Monday. The move lower comes as the US Dollar gathers modest traction, with thin liquidity and subdued volatility amplifying price swings amid the US market holiday.
GBP/USD flirts with daily lows near 1.3630
GBP/USD has quickly given back Friday’s solid gains, turning lower at the start of the week and drifting back towards the 1.3630 area. The focus now shifts squarely to Tuesday’s UK labour market report, which is likely to keep the quid firmly in the spotlight and could set the tone for Cable’s next move.
USD/JPY advances on weak Japanese GDP, holiday-thinned trading
USD/JPY rises while US and Japanese markets remain closed for holidays. Weak Japanese Gross Domestic Product figures curb tightening expectations. Investors await speeches from Federal Reserve Vice Chair for Supervision.
Editors’ Picks
EUR/USD looks sidelined around 1.1850
EUR/USD remains on the back foot, extending its bearish tone and sliding towards the 1.1850 area to print fresh daily lows on Monday. The move lower comes as the US Dollar gathers modest traction, with thin liquidity and subdued volatility amplifying price swings amid the US market holiday.
GBP/USD flirts with daily lows near 1.3630
GBP/USD has quickly given back Friday’s solid gains, turning lower at the start of the week and drifting back towards the 1.3630 area. The focus now shifts squarely to Tuesday’s UK labour market report, which is likely to keep the quid firmly in the spotlight and could set the tone for Cable’s next move.
Gold loses momentum, eases below $5,000
Gold is giving back part of Friday’s sharp rebound, deflating below the key $5,000 mark per troy ounce as the new week gets underway. Modest gains in the US Dollar are keeping the metal in check, while thin trading conditions, due to the Presidents Day holiday in the US, are adding to the choppy and hesitant tone across markets.
Bitcoin consolidates as on-chain data show mixed signals
Bitcoin price has consolidated between $65,700 and $72,000 over the past nine days, with no clear directional bias. US-listed spot ETFs recorded a $359.91 million weekly outflow, marking the fourth consecutive week of withdrawals.
The week ahead: Key inflation readings and why the AI trade could be overdone
It is likely to be a quiet start to the week, with US markets closed on Monday for Presidents Day. European markets are higher across the board and gold is clinging to the $5,000 level after the tamer than expected CPI report in the US reduced haven flows to precious metals.
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