The most important quality for an investor is temperament, not intellect.
Warren Buffett 

Our Forex trading results are simply the outcome of the between

  • (a) the natural flow of markets, which are objective variables, and 
  • (b) our systematic response pattern, which is a subjective trading plan. 

The quality of our market analysis, risk management, and trading strategy is decisive on success. However, ultimately, it all boils down to our trading psychology when making trading decisions. Trading psychology is the most important, but least considered aspect by Forex traders. Trading is an emotional experience; we feel a lot of ups and downs which affect our perspective. Allowing our feelings to infuse into our trading decisions can lead to detrimental outcomes. Important tips to maintain a sound trading psychology:

  • Have a Trader Mindset: define your own trader mindset and isolate it from your personal everyday state of mind.
  • Observe Your Emotions: be aware of what you are feeling now, and what triggers can change your emotional state. 
  • Exercise Emotion Regulation: consciously remain calm and disciplined when making trading decisions.

Trading Mindset

We often find ourselves watching the charts, wondering where the next opportunity will be. At some point, the urge to open a position on each and every movement becomes irresistible. We feel like a machine gunner who shoots at every possible target to get results. Submitting to that urge, all we realise is that profitability isn’t achieved that way.  Instead, we should be a sniper who follows a target closely and seeks the right moment to hit. A market sniper is a mindful trader who exercises discipline and patience at the face of events. 

-o-
I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.
Jim Rogers
-o- 

Mindfulness

Mindfulness refers to being here and now and observing in a non-judgemental manner. Continuously monitoring a price chart overwhelms us with a load information. We miss the necessary details and have reduced capacity to evaluate the markets objectively. As a result, our effective state infuses into our decision-making process when trading.  Instead, we should analyse the markets and trade Forex periodically and mindfully. We should be aware of our current positions and observe the market objectively with a goal.  

Discipline

Discipline is always about making a conscious choice to stick to a plan and achieve its goal. Creating a trading plan gives us an idea about what we want, but it’s useless if we don’t apply it.  Oftentimes there will be market events that evoke negative or positive emotions. These emotions can deter our discipline and tempt us to trade on the spur of the moment.  We might be mindful when such feelings arise and purposefully stick to our trading plan.

Patience

Patience is the toughest part of having discipline and probably hardest virtue to master. When times get rough and emotions are strong, we should trust the effectiveness of our plan. Being aware of our emotions prevent submitting to them and facilitate patience. However, if we don’t keep our emotions in check, they can lead to irrational decisions.  

Staying Calm

-o-
If you personalise losses, you can’t trade.
Bruce Kovner
-o-

Price actions can tempt us to open more positions or close the existing ones. However, our analysis and decisions can bring success only if we are calm when we make them.  Regardless of what happens in the markets or in our life, we must not give in to temptations. Don’t try and fight the markets, because the power of markets is greater than any trader.

Emotions in Trading 

There are certain emotions which are strongly associated with trading activities. These emotions can easily infuse into our decision-making process. Being aware of what can trigger which emotion can help us to control them as they surface.

-o-
The four most dangerous words in investing are: “This time it’s different”.
Sir John Templeton
-o-

Negative Emotions

Fear

Fear is an automatic survival response against perceived threats and can inhibit us when trading. As the strongest driving force, it’s heavily influential over the decision-making processes. We subconsciously perceive the uncertainty in price movements as threats and experience fear. Even when we are sticking to our trading plan, a true opportunity can appear as unsafe to trade. When we have open positions, fear-based false alarms can cause us to close positions too early. 

Anger

Anger is usually felt when a substantial loss is consolidated.  When we feel angry at the market, we are actually angry at ourselves for bad decisions. In order to prove our abilities, we open more positions with large volumes to recover the loss. This is one of the major pitfalls in trading, which ends up with losses larger than the initial loss. We should remind ourselves that losing in some positions is a natural part of Forex trading. Our main goal is to achieve profitability in general and not in every single position.

Regret

Regret is felt when we do not take advantage of an opportunity and watch it materialising. To compensate, we open a delayed position although the trend peaked and end up with losses. Instead, we should accept the fact that we missed this opportunity but there is more to come. We can benefit from the next one, maybe in another asset or maybe the recovery of this trend. However, we should apply this only if our trading plan has a trend recovery trading strategy.

Overwhelmed

Constantly monitoring the markets and seeking opportunities can be very overwhelming. Feeling overwhelmed means that our mental capacity to evaluate information has reduced. Our subsequent decisions are bound to contain numerous mistakes. If we are unable to focus with a clear mind, we should immediately cease trading. At that moment, we should start distracting ourselves with other things until we can regroup.  Having specific criteria to trade in our plan usually mitigates being overwhelmed.  -o- 

Positive Emotions

Greed

Greed is the opposite of the fear coin and manifests when we suppress a healthy level of fear. It usually leads us astray from our trading plan and turns trading into gambling.  Generally, it manifests as keeping an already-profitable position open, hoping for a little more. However, trying to score more pips often results in a reversal, costing us our floating profits. Likewise, opening too many or too big positions for one trend is considered as greedy trading. We’re likely to miss the fading of the trend and end up with multiple losing positions.

Excitement

Excitement is often a good motivation to look for new trading opportunities. However, getting too excited can have adverse effects. A new market event or the hype of a new asset type often induce great excitement. They may cause us to forget the associated risks and start trading without proper analysis.  

Hope

Hope is the wishful thinking that the markets will work in accordance with our desires. The truth of the matter is that the market doesn’t care about us. Our trades should be based on what is happening in the markets, not what we want to happen.  We should ask ourselves if this position is based on rational perspective or wishful thinking. Hope can also make us remove or extend stop loss limits hoping that the market will reverse. However, almost always it does not. 

Overconfidence

As we gain knowledge, develop skills and score profits, our confidence increases. We get especially overconfident when we close a few profitable positions one after another. The temptation to trade more and capitalise on our luck gets too strong. In reality, most traders incur the largest losses after consolidating few profitable positions. They become overconfident and start ignoring the system they have been applying. 

Emotion Regulation Techniques

While there are many emotions involved in trading, we are not at their mercy. There are mental and behavioural techniques to regulate our emotions and balance our mind. Psychological science outlines the self-control methods to detach emotions from trading. 

Study Your Emotions

Understanding your personal experience with emotions. Studying when and how they appear, how long they remain, what else they affect. Knowing our regular emotional experiences can help identify them as they occur when trading. We can learn more by reading about the relationship of emotions, behaviours, and decisions. 

Affect Reduction

Emotions are useful in certain aspects of life, but trading isn’t really one of them. A streak of wins or losses can quickly generate strong emotions. If you’re feeling strongly emotional, regardless of which, disengage from trading activities.  For example, take a break, take a walk or run an errand. This will calm you down and prevent your affective state to infuse into your trading decisions. 

Emotions in Trading Diary

Trading is a dynamic process and we need to adapt continuously to changing market conditions. The best way to observe and analyse our trading performance is to keep a trading diary. Including an “emotions” section can help us see how our emotions influence our trading. We can add a chapter for our rational inhibitions to emotional trading decisions, as well. 

Reminders

Trading is like any other business and requires a dedicated workstation. Set notes on your table, screen, or computer desktop to remind yourself not to get emotional.  

Mindfulness Exercises

Mindfulness is an important component of having a solid trader mindset. There are many mindfulness exercises suggested by psychologists. These can be found on Internet in text, audio and video formats. Allocating time every day to practice mindfulness can improve our emotion regulation skills.  

Self-Discipline in Life

Whether trading is your main source of income or not, self-discipline is still necessary. You must have a certain everyday routine that allows you to engage in other things.  It would help you build a sense of self-discipline in life and infuse into your trading activities.  

10 Qualities of a Professional Trader

Traders who are successful enough to make Forex trading their main source of wealth often share the same 10 qualities:

  1. Knowing personal strengths and capitalise on them
  2. Knowing personal weaknesses and improve on them
  3. Having full their understanding of trading plan and the trading edge they have
  4. Remaining realistic at all times, at all costs
  5. Enforcing conscious self-discipline and self-control
  6. Investing only the capital which they can afford to lose
  7. Analysing markets not all the time, but only when necessary
  8. Trading on what they see happening, not what they want to happen
  9. Trusting their own gut, plan and knowledge more than fundamental and technical indicators or opinions of other analysts and traders 
  10. Using simple analysis, money management and trading strategies instead of complicated methods