Mastering Forex Trading Psychology
Forex Trading
There are many reasons why online traders struggle to succeed but the one I am focusing on today is the Psychology of Trading. It is hard enough to make money, that you don’t need psychological factors to work against you but that is the reality. As with all my discussions, everything I say comes from experience and not from anything I have read in a textbook.
Forex Trading
Retail traders need to avoid those blowups days – when you lose control and take a large loss that is hard to recover from . This does not mean you won’t have losing days or trades but the key is to avoid those out of control days.
1) Rapid Eye Movement
Have you ever put on a position, stared at the screen watching the price changes, see the market go against you, then see it come back to your entry level where you get out only to see it continue in the way of your original trade? You initially breathe a sigh of relief that you did not lose money but then kick yourself for getting out. then look at your trade recap. You were in the trade for a minute and a half, not a length of time anyone would consider long enough to give a trade a chance to work. While this may be an extreme case, even 5 minutes staring at price changes can sometimes feel like 5 hours. This is where the deck is stacked against you.
I call this rapid eye movement because there are so many ticks going on that it can make it feel like you have been in a position forever. I am sure it was not even a consideration when electronic trading started but it certainly has a psychological impact that favours the broker. Brokers count on traders taking off winners or potential winners too soon while letting losers run. Rapid eye movement is one reason this may happen.
There is no easy solution to this as long as you are watching the price changes. Being aware of what I call rapid eye movement may help you take a deep breath, see the market with a clearer eye and give your trade to time to play out.
2) Don’t trade Scared
No one likes to lose money even though it is part of the game. This is easier said than done because I don’t think I have ever put on a trade where I didn’t have that feeling of trepidation immediately afterwards waiting to see if I timed my entry right.
However, don’t confuse trader anxiety with being scared. We all get butterflies when waiting for a trade to unfold but anxiety is different from being scared. The former is part of trading. The latter is a psychological impediment.
3) The Market is Not Your Enemy
- Have you ever had one of those trading days? Have you ever lost money trading and gotten mad at the market?
- Have you ever taken it personally, lost discipline and tried to convince yourself the market is wrong?
- Did this make you feel like the market was your enemy?
- Did you repeatedly fight the trend in order to beat the market only to see your trades stopped out?
- Did you ever try to flip from long to short and back to long, each time buying the top or selling the bottom, determined to outsmart the evil empire?
- Did you double your leverage in an attempt to make back your losses, determined to beat the market at its own game?
Did it happen to you?
Some of this has probably happened to most traders at one time or another but it is not something you want to repeat. Think of it this way. If you ran into a wall and smashed your head you would not do it a second time. Just as the wall is not your enemy, the market is not your enemy. Falling victim to the psychology of trading is your worst enemy.
I saved this forex trading post from a few years ago and while the levels are different, it is as applicable today as it was at that time. In this example the trader repeatedly bought USDJPY even though it was in a downtrend and falling (oh how the trend has changed but not the trading psychology).
Last 2 weeks it was very painful experience being long this pair to no avail. It was more a lesson in patience than any profitable venture at all. I’m constantly asking myself why I persist as I have myself pointed out that it is mainly a side show now.
Now that you asked me I must admit it was a psychological anchor from the past that I “know” they will come in and give it a lift so I was AFRAID to trade it from the TREND perspective which I have said many times I’d favour.. So YES, I’m persisting on the wrong side of the market and I got my share of pain on that one…
Discipline is The Key
Now, this is where the “market is my enemy” can take over. You can’t believe the market is acting irrationally and keep buying (or selling) at every pause. Each time you get stopped out you get angry, not at yourself but at the market. Can’t believe the market is doing this to you and stiffen your back. You forget about what charts are saying, throw discipline out the window and become determined to catch the top by selling (or bottom by buying) when charts are telling you the opposite. By the time the move stalls out, you are a beaten trader. You have taken your lumps in what has been an emotionally draining day battling with an unemotional market.
Forex Trading
Does this sound familiar? If so, then don’t repeat it. Step back when that feeling comes and take a deep breath. Walk away and come back with a clear head. Remember, the forex market is not your enemy. It is not a living organism. It is only a place where trades are transacted and prices set. When that feeling comes, remember the adage, “The market can remain irrational longer than you can remain solvent.”
4) Get Rid of the Emotion
It is hard to get the emotion out of trading but the best way is to take a systematic approach that gives you confidence. Once you let your emotions take over you lose objectivity and discipline. I remember when I was a bank trader I would play a game with myself that no one would know when I was having a good or bad day trading. It helped me (and still does) contain my emotions and stay disciplined. This brings up the next subject, which is something many retail traders fall victim to.
5) Don’t Base Trades on Emotion or Intuition
Do not make trading decisions because a currency feels like it is too low (cheap) or too high (expensive). Brokers count on it. Traders lose by it. This is another psychological factor as you may be making trading decisions based on emotion or intuition and not what your analysis is saying.
One way to get around this is what I call going out of body.
The term out-of-body experience is defined by Wikipedia as An out-of-body experience (OBE or sometimes OOBE) is an experience that typically involves a sensation of floating outside one’s body and, in some cases, perceiving one’s physical body from a place outside one’s body
There is usually a negative connotation associated with an out-of-body experience as it is not done intentionally.
I use it differently and positively for trading. For me it means stepping back from the emotion of trading and taking an objective look at the market so you can make objective trading decisions. This is not easy to do in the heat of battle when you are staring at your platform, but if you can master this you will eliminate some of the psychological factors that work against you.
6) How to Build Confidence in Forex Trading
So you may ask how to overcome some of the psychological impediments that may impact your trading?
Unless you want to go automated and that route has limitations, it is an ongoing battle. The first step is to remove the psychological obstacles to trading. Step two is to build confidence. For me, and I can only speak for myself, and without trying to sound like an infomercial, I believe confidence comes from trading on the strong side of the market. As those who follow my thinking know I feel that finding the strong side of the market is more than half the battle. There are many ways to determine the strong side of the market. Find one that works for you and see how it feels when you trade from that side.
All that said, I have to lighten up the atmosphere a bit here….so a bit different Psychological approach to trading follows…
The Psychology of Forex Trading With a Little Humour
There is a huge difference between talking and acting in the foreign exchange world. Actually, it takes some naturally built-in guts to pick up the telephone and conclude a transaction. And it is true that “either you ‘ve got it or you ain’t got it”. Traders agree that «once a trader always a trader». Even the best market analyst is not necessarily a born trader. And on the other hand a trader can never really give up the trading instinct.
However, whereas these people are the big stars when booking profits, they become the loneliest people in the whole wide world when writing a loss. As one of this species, I am presenting a humoristic article, which was written a long time ago, at a time that market information was not available through on-line pages on a screen but rather through slow telex machines. Technology has changed dramatically since then but I can assure you that trading psychology remains the same.
Written by Gerry Gohler, V.P. Wells Fargo Bank, L.A. in the late’70s
General guidelines for junior dealers after taking their first major Forex Trading
position or the dealing with the agony and ecstasy of being right or wrong.
At close of forex trading session:
Settle nervousness of abdominal area with several cocktails of your choice.
Settle following aggravated nervousness with Alka Seltzer.
Watch traffic carefully on way home. Other drivers are unaware of your pre-occupation with Japanese Yen and could not care less.
Pay no attention to wife and children, you are alone in the world.
Hurry with your supper because of necessity to watch the 5 o’clock, 6 o’clock and 7 o’clock news. At each of these newscasts feel either elated or depressed at the news.
Next steps…
Maybe phone Singapore and see how the currencies open. If unchanged or slightly down from your price settle down for an evening of tube watching. You might not comprehend the stories but you may watch for news flashes during the actual shows.
Stay up until about midnight, so you can watch the 11 o’clock news.
Take additional Alka Seltzer and before going to bed (you don’t sleep anyway) maybe call Zurich or London and see how things go.
Toss around and talk in your sleep. Your wife will love you for it, especially when you mumble: «I should not have gone in -or I should have pulled out and why did I do that.» This will leave room for speculation on her part about your sanity.
Half way to the morning…
Get up around 5:30 am and maybe make a call to Frankfurt.
Start a hurried breakfast (coffee and Marlboro with an Alka Seltzer will do).
Avoid rush hour by driving to the office at 6 am. (You can do this without putting your tie on, lots of time for that after you unwind your position).
Run from parking lot to office and curse slowness of elevators.
When arriving in trading room run in direct line to the Reuters machine. Tear off 80 feet of accumulated news and with your left hand pick up telephone to broker. Don’t bother with «Good morning» (brokers don’t take positions and don’t understand your problems). Scream into phone «How’s the Yen», hold your breath.
Take bid and offer and write figures on piece of paper.
If you unwind position at huge profit do the following: Write the ticket and calculate net profit.
Profit in Forex Trading
Your mysterious stomach disorder clears up immediately being replaced by sense of triumph, elation. Hot flushes of success. The real greatness of your own genius will dawn upon you immediately. Laugh hysterically at your own good fortune, slap top of desk and find the world a truly beautiful place to be in. Pick up telephone to brokers, clients, friends and with due modesty let them know how you interpreted the difficult market correctly and had enough guts to take a stand and make an educated guess and take a calculated risk which paid off… Tell some mild jokes to show your human side even if you know that you are really the greatest. From the reaction to your jokes you can easily tell how your friends in the other bank made out last night.
If they laugh with you, they had the same position. If they just say «hmm, oh yeah» they lost money and don’t feel so good. Don’t press them at this point, hang up and let them call you back later. Show them you have compassion and say something like «It happens to the best of us».
Loss in Forex Trading
If you find that the market (and the whole world!) has turned against you, do the following:
Exhale deeply. Sit down, calculate your losses.
Cast furtive glances about you and determine who is in the immediate area.
Turn introverted. Answer other peoples questions politely but firmly: «Sorry I can’t talk now, but I am working out a complicated deal.»
Repress hot flushes of past failures and fears of your entire future and stop your mind from racing in circles.
Clear your mind and start thinking of how to explain this loss to your boss.
During the period don’t accept phone calls, the inflection in your voice might tip off other bankers to your true position. Telex calls are OK because of impersonal nature of machine.
Take two Alka Seltzers and more coffee and Marlboros. and wait for bosses arrival.
Since bosses arrive usually two hours after the common people you have ample time for strategy.
List past losses (if possible from predecessors or ideally fro boss himself!)
Blame loss on outdated revaluation system.
Recite past profits and your own merits in bringing in several large accounts two years ago.
Make the following statements with authority:
- We are a big bank and have to trade to maintain visibility in the market.
- You can’t be right all the time.
- We have 14 more working days to break even.
- Are we a big bank or some provisional schlock outfit?
- Put boss on the defensive by saying «I thought you knew about this and I had your full support».
- Blame President Carter, Blumenthal, Kahn for being incompetent.
- Tell him that Chase, Citi and Morgan have the same position only 20 times larger and they must be really hurting by now (this will make boss feel happy that he is not Chase etc.)
- Don’t talk to anybody if you can avoid it, especially auditors (they are against you anyway) or Operations people (they don’t understand).
- Take floating holiday at secluded beach, preferably alone, and don’t forget your Alka Seltzer.
- After a second of thought….take two Alka Seltzers
Forex Trading
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sinisa
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