The Importance of emotions
To be a successful trader you need to be the master of your emotions. You have to be a realist deal in reality and not wishful thinking. Fantasy is rife amongst the ranks of the many failed ex-traders. Some rookie traders believe themselves to be so smart that they could outperform a 20 years seasoned trader within a few months of starting.
Typical emotional faults by beginner traders
A rookie trader will develop supertitions about trading and ignore basic facts that coincidences happen.
When a rookie has a lucky winning streak, he develops a feeling of infalliblity and starts to increase the size of his trades. Sooner or later he will lose all of his account. Usually sooner. Just as devastating is when a rookie experiences an unlucky losing streak causing him to become cautious, fearful and paralysed by fear. He might throw out perfectly good trading methods and keep replacing them with more and more dubious methods until he has lost all his money and quits.
The myth of the “big secret”. Many newbie traders believe that there is a single, simple magic technique that will guarantee them success one they gain the “secret”. There is no single simple secret.
These newbies may pay lot of money to scammers that will sell them the “secret” trading strategy or technique. Then they will proceed to lose a lot of money and continue to lose all their money. Their ego will not allow them to admit that they were stupid enough to have been scammed. Sometimes, a newbie might obtain a good trading strategy but then will then misapply it and again lose money. They might then curse the good system instead of sitting down and analysing what went wrong.
Many newbie traders start off with a small account and the start trading straight off. They will lose all their money. Then they will blame the size of their starting capital as the reason why they crashed out. Their ego prevents them from looking at the real reasons why they failed such as having poor trading rules, not having trading exit rules and having poor risk management. They reason instead that if they had a bigger account, they could stay in trades longer until they turned around to prove them right. A bigger account in the hands of a newbie would just result in bigger losses. At best they would last longer before losing everything. A sensible person would start with a small account and practice until they consistently won before trying out a bigger account with bigger trades.
Beginners do not know how to cope with losing trades. Often they just stick their head in the sand and refuse to admit that they were wrong and just wait and wait until the market turns in their favour. Indeed it might but usually after their account has been wiped out.
Forex Trading Robots
Another mistake that newbie traders make is to rely on automated systems. Either through laziness or belief in get rich quick schemes newbies pay sometimes large amounts for a trading robot. The lengths people go to avoid taking responsiblity for their decisions is extraordinary.
The quality of these systems varies enormously and there is little correlation between price and quality of the robot. Nevertheless, most robots are guaranteed losing systems (having no common sense) with only a few robots giving the user a trading advantage.
A newbie after purchasing a robot will just relax and let the robot make all the decisions no matter how bad. And many times the newbie will try to “improve” the results of the robot and make losing decisions. Avoiding learning about trading puts the newbie in a vulnerable position. He will not be able to see how good his robot is. He might stubbornly refuse to back test his robot to see if it actually has a winning edge. His ego will prevent him from examining whether he was wise to buy the trading robot.
The only good thing a trading robot does is to remove the emotional element from trading and also automates many simple mechanical decisions.
A complex intellectual activity such as forex trading is almost impossible to codify into a trading robot. The only people who get rich from trading robots are the sellers and programmers of these trading robots. Note that neither of these group actually trade themselves with the trading robot.
Following Forex Experts
When learning a new skill or activity most people don’t apply their own critical thinking ability to aid learning but instead feel safer following an expert blindly. In Trading there is always the expert “predicting” the next bull market or bear market. Eventually they get proven right and people ignore the numerous times they were wrong. On the occasion when these “experts” are right then people start following their methods.
There are other slightly more sophisticated experts who continually offer their methods. One can only wonder why such experts don’t spend more time applying their method to winning in the markets rather than letting out the secret to others.
Some of these trading methods work at first but when others join the bandwagon these methods become less and less useful until they stop working.
There are other “experts” who sell trading courses that promise to teach you how to become an expert and winning trader. Oftentimes, what they teach is information that is already freely available on the internet. All that it would take is for you to seek out these techniques and methods followed by extensive testing and practice.
Wishful thinking forex trading
The biggest psychological problem for newbie traders is that of wishful thinking. Newbies go to extreme lengths to avoid examing their methods and techniques impartially. They stubbornly avoid backtesting their trading methods and refuse to record their trading history (in a trading journal) for future examination. Instead they prefer to rely on their “superior” hunches and intuition. Only experts with many years experience could possibly rely on intuition, not a newbie.
The Self Destructive Personality
Trading as gambling. Many newbie traders go into trading and act exactly like gamblers. They will magnify the emotional impact of winning trades while minifying the emotional impact of losing trades. They will be in denial about the actual rate of losses. They will get addicted to the thrill of winning. And also will get depressed when they lose. They will refuse to look the facts squarely in the face to determine how well they are doing.
Remember trading is like fighting a war. You will lose many battles/trades and win many battles/trades.
Your goal as a trading general is to with the war overall. You do this my minimise the possible losses down to a particular trade and maximise the potential gains from winning trades.
As in war where you lose battles that should have been won and win battles that should have been lost, so in trading you will sometimes lose on winning trades and win on losing trades.
Your overall trading battle must be a winning one. Each trade will be a gamble with their being no guarantee of winning. Each trade must be made with the monetary odds in your favour. Never make a trade when the expected winning potential is less than the expected winning potential.
As a beginner, facing a more powerful foe your primary goal should be survival by any means and constantly improving your fighting/trading ability. Survival means protecting as much of your capital as possible. You need to survive long enough to gain enough experience and skill to become a winning trader.
Techniques to Coping with Emotions in Forex Trading
The basic emotional trick is not to take each loss (or win even) personally. Each individual trading win or loss is not a measure of success. Each win/loss us not a reflection of your intelligence or skill. You must satisfy your ego on having an overall winning strategy and correctly applying it. For example the bad luck of a long losing streak does not mean you have become stupid as well as a lucky long winning streak does not mean you have become a trading genius. The skill is in recognising when your losing streak is due to bad luck as opposes to poor trading techniques.This also applies to distinguising between a lucky winning streaj and a winning strategy. It is only when you examine your trades over a longer streak that you can determine which is which.
Make a determined decision that you are going to become a trader and that you will still be a trader years from now. See it as a profession with career development.
Learn as much as can about trading techniques. Develop your own personal trading system. By all means learn from experts but all that you learn must be integrated into your trading system. What you learn from experts must be a supplement to your own methods, not as a replacement. Remember experts can sometimes be wrong and usually do not divulge everything they know. Many things that expert traders know are done instinctively and they may not know how to explain the details.
With all the excitement of opening a trading account you might become over-eager and jump into trading without being ready. You may feel you are missing out on great opportunities. Put those emotions aside. You will learn very little by just placing trades without preparation. The best way to learn to trade is to learn about some techniques, then plan how you will trade, when you will trade and how you will exit that trade. Write down what you plan to do. Do it. And then make notes of what happened to see if it went as planned.
You must always be on the lookout for methods that improve your skill at predicting the market short and long term. Many books will show you nice charts and trading indicators such as moving average crossover, breakout , candlestick patterns, head and shoulder patterns, etc and they will show how it successfully predicted the rest of the chart. That is great in hind sight, but in real life. You cannot trade into the middle of a chart after you have seen the result. You have to trade before the chart has panned out into those nice patterns. Always practice your predictive techniques. Test your techniques at the right edge of charts and then see how those charts panned out. Remember, you cannot be right 80,90 or 100% of the time. You must strive to increase the number of times you are right compared to the number of times you are wrong.
You must learn about money management sometimes called risk management. You must never put yourself into a position where if a long losing streak happened that you would lose a huge chunk of your capital.
Even a good trading system can be ruined by trading emotionally. Do not act impulsively. Do not indulge in revenge trading. Do not try to battle the market. The market does not recognise your past wins or losses. Your past wins and losses have absolutely no influence on the future of the market. If you have had 8 losses in a row, it does not affect whether the next trade is going to be a win or a loss. Each trade is made afresh.
To be successful, you need to remove petty aspects of your ego. You must remove emotional laziness from your thinking. You will definitely have to adjust some long held beliefs on how things actually happen in the market.