When someone says the term "Trading Psychology" they are referring to the emotions and mental state of a trader that may dictate the success or failure when trading Forex or any other financial market. This trading psychology is unique to the individual trader. However, in general, it represents various aspects of an individual’s character and behaviours that influence their trading decisions and consequently, the actions they will take in the markets.
Trading psychology can be as important, if not more important, than other attributes such as fundamental, technical and sentiment trading knowledge, experience, and other general skills that are important in determining if a trader will be successful in the markets.
Discipline and risk-taking are two very important aspects of trading psychology since how well a trader will implement them are essential to the success of their trading plan and ultimately if they can make a profit or not. Fear and greed are commonly associated with poor trading psychology. Hope and regret can also be a part of negative trading behaviour.
In the following Wiki, we will explore many aspects of Trading Psychology as well as strategies to help cope with negative trading behaviour. This is a large Wiki so take your time in the table of contents and pick what seems right for your situation.
Introduction to Trading Psychology
You may have heard that the failure rate for new traders is extremely high. This is something that we have touched on in previous sections of this training. However, we should highlight that this is especially true in the case of retail FX traders.
But why is the case? The answer lies in the focus what retail traders tend to focus their learning on. I'll use two traders as an example. The first trader is a complete newbie who has decided to trade from home utilising the teachings from a bunch of different internet courses for his training. It’s highly unlikely that this trader will ever get exposed to enough training on the topic of psychology. He may hear some famous clichés or even read a book or two but generally the focus on psychology will be very low when compared to the other 4 elements of successful FX trading. In fact, he will probably only be exposed to technical analysis alone for his training because that is what most training packages on the internet chose to focus on.
Therefore most retail traders will focus the vast majority of their training on technical analysis. Technical analysis is the choice of almost all retail traders to use with their trading efforts. The reason for this is that technical analysis is sexy, very visual, simple, and interesting. It's also very black and white, if this pattern occurs do this, if the indicator says this then do that. Unfortunately it’s also totally useless without the other 4 elements of professional FX trading.
Choosing to focus on technical analysis alone is the most common and biggest mistake that retail traders make. However, it’s not necessarily the retail traders fault. 99% of all the Forex training programs on the internet are all based in technical analysis. So how is it possible for them to get all the info they need to succeed when it’s virtually impossible to find it all in one place? There are some courses that will teach some risk management skills and others that will talk about having a proper trading psychology but this will likely be a small component of the training.
On the other hand, if we look at a trader whom has just completed and graduated an institutional level training such as this program, they too will have received much education and training. They will also learn about technical analysis but the biggest thing I want to point out here is that the institutional trader will have extensive exposure of training and development on their trading psychology. This will not just be a course; rather, keeping a healthy trading psychology will be an ongoing process over their entire trading career. There are plenty of trading firms that pay big bucks for in house trading psychologists. The reason they would do this is because the traders are the firms money makers and making sure these traders are making sound trading decisions and not allowing outside influences to affect their trading is a major priority. Paying a good trading psychologist a couple hundred grand per year can save the firm millions so it's a no brainer for the firm.
The exposure rate of technicals and psychology are at opposite ends of the scale for retail traders versus institutional professionals. This is why I will give you extensive trader psychological training here. I want to make sure that you have the tools you need to overcome your psychological hurdles. You can come back to this section whenever you are having an issue with your trading psychology that needs to be sorted out.