Trading the forex market is a fascinating and potentially highly rewarding undertaking. On the one hand, the task is a relatively simple one, yet on the other, it is highly complex.
Ultimate trading success is a battle fought in the mind and stomach. It is a matter of conquering one’s inner demons. For each trader, it is he or she who is the most potent enemy. We have all met and know this enemy: it is you and me.
There are countless examples of how the market can (and does) play tricks on our minds, how it tempts and seduces us, preying upon our human frailties and constantly tests our mental resolve.
C'mon, join the party. Procrastination is not conducive to trading. Photo: iStock
Arriving too late to the party
Take one example. Say EURUSD
has been trading in a well-defined chart pattern for some months and you have been closely watching this in the belief the euro will eventually resolve this consolidation by breaking sharply to the downside. Eventually, the euro does complete this consolidation, selling off strongly, just as you have been anticipating all along.
However, instead of acting when you should have, you procrastinated and frustratingly watched the EUR decline 180 points. Having mentally berated yourself for not acting when you should have, you are left feeling somewhat angry and annoyed, even aggrieved.
The next day and the day after that, you watch the euro fall a further 250 points. By this stage you have taken a “psychological self-battering” and the next morning you feel compelled to sell EURUSD “at market”. The euro declines a further 40 points but then a day later commences a corrective recovery. You place a financial stop loss some 120 points from your initial entry level, only to see the euro rally 30 points beyond your stop and then resume its decline.
You are left financially bruised but far more importantly, mentally scarred by the psychologically recriminations which then dog your mind.
Arriving too early to the party
Another example is where the trader develops a strong opinion about a market. Say, he is very confident that USDJPY will sustain a large selloff. So keen is the trader to participate and back his view that he makes numerous attempts to establish a short USDJPY position before the market is ready to start trending and he is stopped out each time. Aside from the financial knocks incurred, it is the psychological setbacks that prove most injurious to him, as the market plays with his mind.
When USDJPY is finally ready to start trending, our trader is reticent to act, still sporting the battle wounds of earlier attempts. His confidence has taken a hit and he is reluctant to pull the trigger when it really matters. Frustratingly, he watches as USDJPY sells off aggressively and his mind games intensify.
Arriving at the party with a token gift
In this example, our trader closely monitors the market’s broad, multiweek corrective consolidation (say, of AUDUSD). He exercises due patience and judgement by waiting for the right moment to execute his trade but when the time arrives, instead of executing with his requisite trading position (in accordance with his trading plan), he trades only a token amount.
Upon finally completing its broad corrective consolidation, AUDUSD rallies strongly and our trader is so pleased that his judgement has been vindicated, he only belatedly focuses upon the fact that he has very little to show for it.
To correct this and ease his mental unease, he only then assumes the position size he should have taken to begin with. His stop loss is then more financially driven than market driven and on the first significant corrective reaction in AUDUSD, he is stopped out (only to see AUDUSD's advance resume shortly thereafter) and his mind games rage.
Our trader’s initial hesitancy displayed a failure to commit and then his subsequent action to rectify matters left him financially exposed. In trading, the real enemy is always very well known to us.