Following on from the Wiki on Trader Psychology Problems, we will now take a look at some solutions to those issues.
Fundamental Analysis
If you want to be a successful trader then you absolutely must learn what is driving prices using some form of Fundamental Analysis. Fundamental Analysis and Sentiment Analysis are what drive almost all currency movement. Fundamental or Sentiment driven markets can happen for a variety of reasons which are more fully covered in the Wikis on Fundamental Analysis and Sentiment Analysis.
One thing to note here is that there are very rare times when the market does drive price purely on the technicals or price action. This does not happen very often but the only time that the market would do this is at a time when there is absolutely nothing happening for the market to focus on. This tends to happen on a Monday after a Friday holiday when there is no economic data that has been released to affect the market and nothing for the market to look forward to either. The market is devoid of any geo-political events or any other fundamental issue to focus on. It is in these times that the market might go technical for its trading but you also have to note that this will likely be a very low liquidity environment which is something that can pose risks to types of traders and their strategies.
Retail traders tend to learn about Technical Analysis first because of the massive amount of technical courses being pedalled on the internet. They are sold on the idea of getting rich quickly and easily. But we can’t lay blame on these retail traders because this is the only thing they can find on their own and who could really blame them for wanting to make a lot of money in a short amount of time?
If you were able to ask any of the biggest currency types of traders in the world what indicators he or she uses to make their trade decisions you would get answers like forward guidance, inflation, interest rate policies, jobs reports, etc. You probably would not hear any of the brightest, biggest, and best types of traders in the world say that they make their trading decisions based on the long stochastic being oversold combined with a crossover of the 8 EMA over the 21 DMA, but only if the RSI has turned positive and the MACD Histogram is above the 0 line. That kind of trading system is reserved for novice retail traders who have never nor will ever make money consistently in the financial market.
There are some technical systems that may work from time to time but wouldn’t it be smarter to focus on exactly what the masters of the financial universe focus on? Economics and fundamentals are not sexy and easy to sell like technicals are but they work when applied correctly. We are all here to make money so we should all focus on the things that will best support this goal.
Relying on complicated Technical Analysis alone will likely never get you anywhere. The financial markets move because of the actions that central banks take in order to achieve their inflation and policy mandates. Expectations of what the [h[Central_banks | central bank]] will do next are also high on the list of what moves the financial markets, especially the Forex markets. Mix that with market sentiment and you will trade much easier and more profitably with a higher degree of accuracy.
Knowledge
As types of traders, we must continually learn what is currently driving the current price of a particular currency pair. Having knowledge of how the market operates is essential in order to make sense of the vast amount of information that is thrown at you every single day. Having a solid foundation of the correct education is essential for you to be able to pick out the relevant information that you can use to pull profits out of the market on a daily basis.
For most markets, the correct knowledge to gain would be around what the fundamental and sentiment reasons are for price to be doing what it is currently doing.
Knowledge can be a double-edged sword if you are not careful. On one hand, it’s great to have lots of information so that you understand the broad scope of the market structure. On the other hand, you will need to be careful not to fall into the trap of analysis paralysis. Your job will be to have enough information to make intelligent trading decisions but not to allow too much information to keep you from making trades. With all things in life, this will be a balance that you will have to find and that is something that will be different for every person.
Conviction
Conviction is confidence and the best way to build confidence is to succeed at something consistently over a sustained period of time. Once you have complete conviction in your trading all your trading psychological problems will dissipate.
You build conviction by focusing on the fundamentals and sentiment situation of the current market conditions. Assess your performance each month and then build a plan to make next month even better. This will be critical, especially in the beginning stages of your trading development. Then you need to make sure that you don’t stress yourself out by starting your trading career by putting all your capital at risk before you have had a chance to learn enough to keep you out of trouble.
We have already spoken at length on conviction so won’t repeat it too much here. We just want to highlight the thing that will have an impact on improving your psychology. You may wish to refer back to the previous section on conviction for a refresher.
Suggestions to Help Trading Psychology Problems
Keep a Trading Diary:
Keeping a trading diary or journal will allow you to look back and see the mistakes you were making and then bring them to your conscious mind. This is helpful because very often the mistakes you make in trading (or in the rest of your life) are subconscious (like switching strategies). This also is a track record of how you felt while in your trades and can show many useful insights into how you might go about improving your trading performance.
Join a Community:
This means joining a community of like-minded individuals and other types of traders who are making money using similar techniques that you are. It should be a place where you can get market information and bounce ideas off other successful types of traders.
Follow a Professional:
Follow someone who has been a full-time trader for many years and has a successful track record. These types of traders are harder to find but when you find one you can learn a lot of helpful ideas to make your trading better. Just make sure that you don’t fall into the trap of blindly following some self-proclaimed trading guru who only wants your money and doesn’t really care if you are profitable or not.
Tune In:
It’s not enough to just scan the news now and then. If you want to be successful in the long run you must be constantly focussed on what is moving price and how the fundamentals and sentiment are playing out each and every day. The speed of information is incredible these days and you need to make sure that you are not making a trade based on yesterday’s news when today there was something that negated that prior news.
You will need to develop a list of “Go To” sources that are reliable at relaying information in a timely manner.
Do Not Overcomplicate Trading:
Trading should be a simple process that you get better at over time and with experience. If you start adding more and more layers to your trading process you run the risk of overcomplicating the process of trading and causing " Analysis Paralysis". Stick with understanding and following the fundamentals and sentiment while developing technical reasons to trade in line with the prevailing sentiment.
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