Excerpt: Fear and greed is undoubtedly a biggest enemy for every trader. Most of the expert traders manage their psychology while trading using their earlier experiences. Learn How to master the psychology of trading with Forex4you’s guide.
How do I master the psychology of trading? This is a question that has undoubtedly been on every trader’s mind at one point in time. Psychology trading is one of the most important factor in trading Forex and also the biggest hurdle. When it comes to psychology of trading, there are three main challenges:
FOMO (Fear of Missing Out)
In this lesson, you will learn how to work, and then hopefully overcome, those three challenges in trading psychology.
Fear or anxiety is common in traders because we don’t know what’s going to happen after we enter a trade. Actually, we have an idea of what will happen but we don’t know this with 100% certainty and when you have a lot of money on the line and don’t know what’s going to happen, it can cause fear. An effective way to deal with fear is by trading within your means and setting an acceptable loss amount. By this way, you know, before you even enter the trade, that you are only risking a certain amount. This takes some of the uncertainty out of the trading process because now we know what is on the line. Every time I enter a trade, I tell myself that I may lose money and that’s OK, just don’t lose more than my predetermined amount! Another way fear gets in our way is when we are trading with too much size that it makes us uncomfortable and fearful of losing too much money or even worse, blowing up our account. That’s why it is so important give consideration to size. Start off small and gradually work yourself up to larger size. Just because you had a solid month doesn’t mean you should go from trade 200 shares to 2,000 shares.
The fear of missing out is driven by a desire to be a part of a good thing, even when all signs suggest that it is not a wise investment. FOMO is so pernicious because we see other people succeeding, even if they are taking unjustifiable risks to do so, and we have a natural urge to join in. The more successful other traders are, the stronger the urge to join in. FOMO is usually harder for new traders to grasp because they haven’t been burned as many times as someone who has been trading the markets for a while. The effective way to counterbalance FOMO is to have rules in place and if you break them then you need to have some kind of punishment like no trading for the rest of the day. You can’t make trading decisions based on emotions no matter how much money you see other traders making on a crazy run. There will always be other opportunities so stick to your rules!
Greed is the other side of the coin to fear. Greed is also similar to the fear of missing out, but more focused on a broader outlook instead of some smaller segment of the market. Under greed, economic, political and financial news is viewed as extremely optimistic, and bad news is ignored by waved-away as unimportant. Greed creates a self-reinforcing cycle of rising asset prices and positive outlooks. Traders become so accustomed to rising asset prices, that they begin to ignore obvious signs of risk or negative outcomes. Trying to squeeze every last penny out of a move is a surefire way to give up profits and even lose money. The best way to handle greed is just like how you would handle fear. Set predetermined profit targets and when they hit, cash in! It’s not rocket science you just have to be disciplined enough to follow your rules!