A fundamental element of successful trading is trader psychology. Individual loss in the financial markets is mainly caused by psychology, which rookie traders sometimes neglect. Trading exacerbates your emotions and leads to irrational decisions. 

Emotions are a trader's worst enemy. You can't win in the financial markets if you can't control them. That is why it is essential to follow money management principles, as they provide the sole protection against your emotions when trading.

Forex Trading Psychology Explained

Trading psychology is the change in perception that occurs when you actively trade your money in the markets. When trading on a demo account, it appears to be simple to make money, and there seems to be no reason why you wouldn't be able to do the same with an existing account. Then you make your first live trade and are unsure when to take profit or minimize your losses.

How well you know yourself and can profit from your strong points while controlling your weak ones determines your success as a trader. When you know yourself, you are aware of how you will respond in particular situations and can shield yourself from self-destructive behaviors or decisions when managing a trade.

Emotions and Forex trading

The question is whether you should listen to your heart or your head. In fact, emotional responses are natural evolutionary states; therefore, it's no wonder that forex traders are susceptible to them. Only by learning to understand and regulate our mental responses will we be able to succeed in the FX market.

Coping with Negative Coping Strategies

It's no secret that our decision-making techniques originated in our upbringing. People transmit their childhood experiences into their adult lives, conditioning them to behave in a specific way. Unfortunately, forex traders are no exception; many begin trading without understanding their coping techniques.

Forex trading and fear are not a good pair

Taking risks and learning to let go are two essential elements in becoming a serious participant in the forex trading market. While we must admit that losing trade might cause unpleasant feelings and anxiety, frightened behaviors are not recommended.

Interestingly, Mark Douglas mentions four frequent concerns in his classic forex trading book "Trading in the Zone", considered as the bible of trading psychology: FOMO (fear of missing out), FOL (fear of loss), FLW (fear of letting a win), turn into a loss and fear of being wrong (FBW).

Since fear aids survival in the wild, both frightened economic conduct and loss aversion can be deceiving. For example, even if you can win a trade, anxiety might obscure your decision-making techniques and cause you to stop. Figures indicate how 95% of forex traders lose large amounts of money and quit.

The Role of Greed in Trading

Confidence is the cure to fear. While confidence is essential for success, trading overconfidence may harm your forex trading strategies. Greedy forex traders frequently risk large sums or continue in a trade for a long period, which can result in losses and negative feelings.

It is worth noting here that trailing stops may be a helpful strategy for helping forex enthusiasts limit their greed and loss rates. Furthermore, forex traders are advised to maintain consistent position sizing when trading.

Euphoria and Cognitive Biases

Greed can result in unrealistic feelings of euphoria and superiority. Some forex traders make unplanned trades and abandon their trading strategies lured by overconfidence. Recency bias is, in reality, a prevalent psychological flaw among forex traders. Recency bias is the mental tendency to focus primarily on the most recent periods of forex trading and winnings.

Confirmation bias is another prevalent error triggered by distorted decision-making, defined as people's tendency to look at data that might support their ideas. For example, an overconfident forex trader may ignore information and charts that confront their thoughts.

Forex and the Blues

However, not simply euphoria might distort your forex trading decisions. Any powerful emotion or profound sensation might have the same negative impact. When you're depressed and attempting to suppress your difficulties, it's one of the worst occasions to trade forex.

Losing streaks, on the other hand, can lead to sadness. This can also result in anchoring bias, the tendency to perceive the future by referring to the past. Some forex traders prefer to ignore the reality that market circumstances are constantly changing and instead focus on their previous losses.

The Attribution of Blame and Forex Trading

Feeling disappointed and unhappy when our forex trading strategies fail is natural. However, when we begin to question our capacity to achieve in life and blame ourselves for variables we cannot control, it is clear that we cannot regulate our emotions.

Blaming ourselves for our losses will only result in intense feelings of guilt, which will be counterproductive. After all, the forex market is full of potential outcomes rather than certainties. It comes as no surprise that good forex traders are mentally prepared for the worst.