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Article / 08 January 2015 at 1:37 GMT

FX trading is a psychological game

Managing Director / Technical Research Limited
New Zealand
  • FX trading success calls for commitment, understanding and hard work
  • Successful trading requires competing with other traders as well as your own mind
  • Powerful emotions such as fear and greed, can impair objectivity and FX success

By Max McKegg

To be successful at trading forex over the long haul, the trader needs to make a serious commitment to this endeavour and that involves “hard work” (click here, to read to my earlier article, "Forex trading is a dream job, but you still need to turn up"), as well as a realistic understanding of the challenge to accomplish this.

Trading is a psychological game and although the trader must obviously compete with all other traders worldwide, he/she must also compete with their own conscious and subconscious minds (to read, "To beat the market, first win the war on oneself", click here), and this is often the most significant challenge of all.
 

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FX trading attracts people who crave action and excitement, but traders need to learn patience,  emotional control, and when to exit a position. Photo: Thinkstock

One of the striking contradictions of FX trading (or any other form of trading for that matter) is that it often attracts people who crave action and excitement. Such people are typically not as placid, tranquil and serene as others and when it comes to trading this can be a real handicap. The reasoning being that successful trading over the long term requires patience, a steel discipline and even trading disposition, as well as being in control of one’s emotions; so that trading haphazardly and indiscriminately does not occur.

Ideally, the trader’s emotional equilibrium should always be in balance, without swinging around. When a trader’s emotions are volatile, it is easy for him/her to stray from his/her trading approach and trading rules; to play fast and loose with trading stops and increase or decrease trading position sizes dependent more upon how the trader “feels” more than an objective technical assessment of the market and the proper application of one’s prescribed trading approach and trading capital.

Even when receiving sound advice from seasoned trading professionals (to read my article, "Forex trading for beginners, get advice from the pros", click here), unless the trader is able to control his/her emotions and keep on an “even keel”, instead of following and learning from this expert advice, the trader will be prone to “second guessing” this advice or selectively applying it, in a manner more befitting of gambling than sound trading.

Fear and greed

It is often said that a trader’s worst enemies are fear and greed. The fear of losing is a very strong emotion that can prevent a trader from executing trades when required or in cutting-out of a position, based not a predetermined stop loss but on a “feeling” that he/she is wrong or a desire not to lose any more when a trade goes slightly against one; without giving the trade every opportunity to work out. Fear can also manifest itself in a misguided desire not to admit one is wrong (another manifestation of a “fear to lose") and failure to stop-out when appropriate.

Greed on the other hand is also a powerful emotion and can compromise the trader’s application of his/her trading discipline by “over-riding” this. A good example, is where the trader “over stays the party” by remaining in a position far too long, because the trader’s desire to profit over-rides an objective technical assessment of when to exit a position. Not content with the profit in hand, the trader has the desire for more. Then, having failed to liquidate the position when appropriate, the trader may compound this trading error, by “chasing” or “over-playing” the market, in an attempt to recoup the money he/she “should” have secured earlier.

It is one thing to have the requisite trading resources behind you and knowing what you should be doing, but if your psychological state of mind does not allow you to put this into consistent practice, then your chances of long term trading success are greatly diminished.


– Edited by Robert Ryan

Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade, then click here to follow him.

For more on forex, click here.




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