A Forex Traders Psychology

When mastering Forex trading, one thing that needs to be considered is Forex trading psychology. This is vitally important and is often thought to be a bigger cause of mistakes than trading skill or a lack in trading knowledge. Regardless of cultural or social background, the same mistakes are repeated by traders. This implies that it is a common human trait that is the root cause of these mistakes.

The Flaws of Human Nature

So, what is this human ‘flaw’? It’s fear. Our fight or flight response can be our downfall. We cannot change our make-up but, in being aware of our primal responses, we can alter our approach. Studying Forex trading psychology can be enormously beneficial for Forex traders.

Fear limits our behavior. We always look for the safest option and so if we are trading and we think we are going to lose profit, we naturally want to pull out and withdraw to inhibit further loss. However, this could mean that you deviate from your planned strategy. Moreover, fear could cause you to make decisions that are not well thought through in the hope you can turn around your trade. Such rash decisions may mean that you end up losing more money that you did to begin with.

Understanding Trading Psychology

Understanding the psychology behind trading can set you in good stead and diminish your feelings of fear as you make trading decisions. Ultimately, traders cannot fall into the trap of emotions when trading. Let’s have a look at some of the more common psychological biases that you may experience in Forex trading:

  • Loss Aversion bias – You think that a price might come back. Your brain is wired to want to make the lowest possible loss which could mean that you pull out of deals too soon.
  • Confirmation bias – You believe that something proves you were right. Looking for justification in your actions can lead you to find links that weren’t there. This can be a difficult cycle to break and traders should learn to trust different strategies to get the most out of Forex trading.
  • Anchoring bias – Coming up with links that suggest something may be right even when it isn’t. Your brain tends to rely on previous experience in making decisions. This can cause you to be afraid to try new strategies and going against your experience.
  • Over-confidence bias – You are over confident in your decisions and believe you know where the market will go. Your brain is wired with the need to feel validated, which means that when things are going well, you may think that you are invincible in future deals.