Does Forex Trading Psychology Really Matter?
Posted 12 months ago | 2:09 PM | 26 February 2016 3
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I’ve often been asked whether trading psychology is really important
for a forex newbie or if it’s just overrated. In this old man’s humble opinion,
sound trading psychology is what sets consistently profitable traders
apart from the rest.I believe that a person’s ability to handle and overcome stressful situations, like experiencing a drawdown, having a losing position, and managing one’s greed, plays a central role in determining a trader’s success.
If you are not psychologically prepared to handle the stress that comes with trading, chances are that no matter how good your strategy is, you will not be able to execute it properly and will most likely see your account deep in the red.
As mikhail86 brings up, just take a look at the Turtle Traders’ experiment run by Richard Dennis and Bill Eckhardt. A group of traders was taught the exact same system, with the same exact risk management guidelines and principles. Some were very successful, while others floundered.
The difference? Trading psychology.
Some of the “turtles” were unable to handle the system’s drawdowns, or closed their trades early and were unable to maximize the best trade setups.
This is very similar to handing over the keys to an F1 car to a student driver and expecting him to carve the racing track like he’s Michael Schumacher. Even with a supercharged car, the student driver would probably lose a race to Huck’s broken-down Honda Fit as he lacks the mental fortitude to handle high speeds and sharp turns.
At the same time, we can’t overlook the importance of trading strategy. You may be the most disciplined and emotionless trader out there, able to stick to the plan and leave emotions at the door, but you’ll probably still end up in the red if the strategy that you’re following to a T is poor and not profitable in the long run.
The key is to find the proper balance between trading psychology and strategy.
Trading psychology may not be able to turn a losing system into a profitable one, but it can equip you with the right tools to develop a profitable system. Having the right frame of mind can provide you with valuable insights to tweak your trading approach to get better results. In effect, having the right trading psychology can lead to a better trading strategy.
Likewise, a lot can also be said about the positive effects a successful strategy can have on trading psychology. You may find that sticking to the plan and weathering drawdowns are much easier when you’re trading a tested and proven system.
The bottom line is this: To become a successful
trader, you will need both the right mindset (trading
psychology) and the right tools (trading strategy). Without
either one, you’re bound to fail.
About Pipsychology
Be Patient. Stay Disciplined.
Patience.
It’s a virtue…Especially with forex trading.Arnold H. Glasgow, an American humorist, once said, “The key to everything is patience. You get the chicken by hatching the egg, not by smashing it.”
Developing your currency trading plan will take time. Developing skills will take time.
Waiting for the right trade opportunities requires patience. Entering and exiting a trade at the right moment requires patience.
Discipline.
Discipline is also a virtue, and it means doing the things you need to do to progress and get better….even if you don’t want do it.This means preparing for each forex trading day or week with research and chart study.
If you’re a mechanical or automated trader, this means back testing systems and constantly trying different settings and strategies as the environment changes.
And of course, don’t forget about keeping a trade journal and reviewing every single day you trade.
Journaling is the one trading task that separates the wannabe traders from the real deal traders. Unfortunately, most newbies won’t do it.
Forex trading concepts and techniques are simple and easy to learn. What’s hard to learn is how to be patient and disciplined to do the right things and make good trading decisions. Truthfully, it will be one of the most difficult endeavors you will ever take on.
To a newbie, sitting on the sidelines and watching the markets move while you wait for your best setups means you’re missing out on profits.
This way of thinking leads to a failure of patience and discipline and causes some of the most notorious trading mistakes in the book:
- Impulse trades
- Letting losers run too long
- Cutting winners too quickly
- Revenge trades
Remember that your job as a newbie is to learn how to make good trading decisions and SURVIVE!
The best thing you can do to stay patient and disciplined is to look at your career as a trader as a marathon and NOT a sprint.
This is not an overnight, get-rich-quick scheme.
This is a commitment to build skills that will allow you to profitably trade in any environment the market will throw at you at any time.
And essentially, free you from the chains of the “Man.” Fight the Power!!
If you stay patient, maintain discipline, and commit to constant improvement, then your results today as a forex noob will probably be nothing compared to the results of the trader you will become after years grinding it out in the markets.
Another thing….
Always remember that opportunities for good trades occur ALMOST EVERY SINGLE DAY!
No need to rush into bad currency trades. They will only set you back from reaching your goals.
Stick to your best ideas and setups, and if they don’t come that session, just wait for the next.
Unless the world stops trading currencies (knock on wood) then there will always be opportunities around the corner.
Stress: Good or Bad for You?
Posted 6 years ago | 3:00 PM | 18 March 2011 5
Comments
Trading, at the very least, requires you to deal with risk and the unknown
every single day. Because of the uncertainty surrounding trading, you will most
likely encounter events that may change your comfort level, aka “stress you
out.” Psychological stress is natural in trading, just as it is for Cyclopip to
eat baby rabbits. But wait a minute… Isn’t stress always bad?! The only thing that seems to be good about being STRESSED is that it’s DESSERTS spelled backwards! (That’s good,huh? I’m so original…)
Kidding aside, psychological stress can be good when it gives way to a flight-or-fight response, wherein you become more alert and mentally prepared to deal with challenges. It’s like a jolt of adrenaline to the brain, which tells your mind and body to react and mobilize. In this case, stress can help you protect yourself and improve performance.
On the other hand, a trader who does not positively react to stress can hinder his/her trading performance. This is when you perceive an event as a threat. Instead of feeling alert and being prepared to react to a challenge, you get bogged down by your fear of the unknown and you become anxious or freeze. This kind of stress can be crippling for making good decisions as you lose your ability to remain calm and focus.
Imagine that you are crossing the street and, all of a sudden, a ten-wheeler truck comes out of nowhere speeding in front of you. How do you react?
Naturally, stress kicks in. If you’ve developed the ability to positively react to stress, or even ignore it all together, your body will immediately react and you run to safety. If not, you freeze in the middle of the road with the deer in the headlights expression on your face…and I can only imagine what’d happen next.
At the end of the day, it’s how you perceive actions or events that give way to either the good or bad reactions to potentially stressful situations. And it’s during these critical situations, how you handle your stress is what determines whether you sink or swim.
How can we use this newfound understanding of stress in trading?
The first step is to know that losing is a natural part of trading and that a single trade, or a string of losing trades, is not the end of the world–with proper risk management of course! Once you have recognized this fact, you can focus your mind on what you CAN do, rather than on what you CAN’T do.
Secondly, you need to realize that in potentially stressful situations, you have to be able to learn respond well (calmly staying focused and rational) instead of negatively (freeze and/or act impulsively). In other words, when faced with stress, you’ll have to train yourself to recognize then dive to get out of the way of that speeding ten-wheeler just as an action star would do, instead of freezing from anxiety and get squished like a bug!
Accepting that losing is a natural part of trading and developing a positive response to market events and your trading actions can only come through one thing: deliberate practice. Through deliberate practice (taking many DEMO trades then observing and adjusting your psychological/physical responses), negative responses to trading stress can be reduced significantly or even be used as a tool to help sharpen your senses to make better on-the-spot adjustments to your trades as new information comes your way.
Learn to accept stressful situations. Embrace it… And heck, once you master your mind and body over it, you might even love it!
What Is Risk Management?
Risk management is one of the most important topics you will ever read about trading.
Why is it important? Well, we are in the business of making money, and in order to make money we have to learn how to manage risk (potential losses).
Ironically, this is one of the most overlooked areas in trading. Many forex traders are just anxious to get right into trading with no regard for their total account size.
They simply determine how much they can stomach to lose in a single trade and hit the “trade” button. There’s a term for this type of investing….it’s called…
GAMBLING!
When you trade without risk management rules, you are in fact gambling.
You are not looking at the long term return on your investment. Instead, you are only looking for that “jackpot.”
Risk management rules will not only protect you, but they can make you very profitable in the long run. If you don’t believe us, and you think that “gambling” is the way to get rich, then consider this example:
People go to Las Vegas all the time to gamble their money in hopes of winning a big jackpot, and in fact, many people do win.
So how in the world are casinos still making money if many individuals are winning jackpots?
The answer is that while even though people win jackpots, in the long run, casinos are still profitable because they rake in more money from the people that don’t win. That is where the term “the house always wins” comes from.
The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money–not the gamblers.
Even if Joe Schmoe wins a $100,000 jackpot in a slot machine, the casinos know that there will be hundreds of other gamblers who WON’T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control its losses. Essentially, this is how risk management works. If you learn how to control your losses, you will have a chance at being profitable.
In the end, forex trading is a numbers game, meaning you have to tilt every little factor in your favor as much as you can. In casinos, the house edge is sometimes only 5% above that of the player. But that 5% is the difference between being a winner and being a loser.
You want to be the rich statistician and NOT the gambler because, in the long run, you want to “always be the winner.”
So how do you become this rich statistician instead of a loser? Keep reading!
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