An often overlooked aspect of trading any financial derivative, whether forex, stocks, options etc, is the psychology of the trader. This means the emotions you experience as a trader, and the effect these emotions can have on your trading. More specifically, it is how you handle these emotions that matters most.
Many people new to trading don’t give this a second thought. And indeed, you’ll be hard-pressed to find a beginners guide that goes into this aspect in any detail. Yet, if you think about it, it really is the most important part of trading.
When you are trading there are two entities involved. One is you, the other is the market. In essense, there is nothing else at play. But what needs to be understood is that what you think, feel and want does not matter one bit to the market. The market has no concept of your existence, and unless you start making trillion dollar trades, it probably never will.
What this means is that your success as a trader depends entirely on what happens in your mind. Technical indicators, well-researched strategies, and all the knowledge in the financial world will not help you if your emotions are doing the trading. For example, say you open a trade in the EUR/USD and it rockets up, your natural instinct will be to be overjoyed. But in reality, if you don’t then immediately close that trade, your happiness will become like a chain attached to the Y-axis of the chart. If it goes down, you’ll be upset, depressed, angry – you’ll be prone to such terrible ideas as shifting your stoploss lower “until it comes right”. If it goes up, you’ll be happy again, which will only add more fuel to the fire should it drop again and further will cause you to keep hanging on in anticipation of further gains and more happy feelings. Few traders are successful who allow their emotions to override their trading strategy.
If you feel your emotions have hurt your trading, you’re not alone – it is probably the #1 unacknowledged problem in forex day trading. Visit theForexSignal.net for a series of in-depth posts for forex day traders. Part one is a detailed account of how your emotions affect your trading, and some possible steps to remedy this.