You don’t have to do much forex trading before you realize that one of its biggest challenges isn’t technical ability or strategy – it’s your mindset. This is something that every single trader has to deal with before they are profitable. And even when they are profitable, it’s still something they have to manage on a daily basis. We’ve gathered here some nuggets of wisdom and forex psychology ideas that we hope will make you a better trader.
15 forex psychology tips
It is no secret that the majority of retail forex traders aren’t successful. You can read it for yourself in the small print of pretty much any broker, that the majority of traders lose money. Why do they fail?
Of course, the emotion for a decision could vary. It could be greed, causing them to take on too much risk. It could be anxiety, closing a trade too early, and missing out on a better gain.
Whatever the reason, it all comes down to the same thing: psychology.
The potential from forex trading is enormous. Every day, 7 trillion dollars worth of foreign currencies change hands. The prospect of gathering a life-changing amount of money and quitting the day job quickly captures people’s imagination. Many people come to forex trading with the idea that it’s a “get rich quick” or a “get rich easy” scheme.
Here’s the thing: it isn’t.
You see, forex trading is no different from any other skill, such as competitive sports, speaking a foreign language, or playing a musical instrument.
In order to be good at it, you first of all need to spend quite a bit of time being, well, not very good at it.
That’s because it takes practice. Simply by virtue of being a beginner, you are going to make mistakes. A lot of them. And there’s no shame in that.
So be realistic. You simply aren’t going to turn a $100 or a $500 account into a $100,00 or $1,000,000 account. This isn’t going to happen, even if you give yourself a year to do it. While it is theoretically possible, it would require such a ridiculous amount of risk that the likelihood of you doing it is, well, it would make more sense to buy lottery tickets instead. Be patient. It’s a marathon, not a sprint.
Get good on a demo account before using real money
A lot of people open a demo account, learn how to place trades, make a little bit of money, and then dive straight into a live account with their hard-earned cash.
We think this is a really terrible mindset to have, and that the word “demo” is a bit of a misnomer. Demo accounts are not just a demonstration of how forex trading works. They are a completely free tool that you can use to develop and test your strategy without risking any money. Once you can show that your strategy is profitable, you can then move on to a real account.
Logically speaking, we think this is by far the best way to do things. There’s simply no point risking real money on trading if you can’t even make money on a demo account.
Forex psychology – accept losing money
There’s a reason why it’s called risk management and not risk elimination. Every single trade you take involves the risk of losing money. In fact, you’re losing money the moment you click the trade button, either due to broker spreads or commission. And another key element from this point is that no indicator, strategy or trader has a 100% win rate. Losses are part of the game – you can’t have a rainbow without the rain.
Forex trading is pretty much the definition of “nothing ventured, nothing gained”. If you can’t accept the possibility of losing your capital, then you should not be trading at all. And if you do trade, you should only ever trade with money that you can afford to lose. Plus, if your broker doesn’t have negative balance protection and you fail to calculate your risk properly, then there is the possibility that you could end up in debt to your broker. That is what is meant by the phrase “Losses can exceed deposits”.
No one trade should make or break you
This one is pretty self-explanatory. You don’t have to search very far on the internet to find videos and articles from people who have put all of their eggs in one basket, and the trade goes against them, wiping out their account.
If a single trade can make or break you, you’re doing it wrong. There is the possibility that the trade is successful, but of course, if it isn’t, it could wreck your ability to trade altogether. You should not expose yourself to this level of risk. Never forget the expression “what goes around comes around” – if you’re operating on the principle that money will come to you quickly and easily, then you also have to live by the fact that it can also be taken away from you quickly and easily.
Use low leverage
A good idea to help prevent impatience and greed from getting the better of you is to stick to low leverage. The lower your leverage, the harder it is to open trades that will wipe out a significant portion of your account if they go against you. That’s not to say you can’t open such trades, but it’s much harder to do so if, thanks to low leverage, you don’t have the available margin for it.
With high leverage, you can lose money literally faster than you can burn it. If you are a forex trading beginner, there is simply no need whatsoever for you to trade with high leverage at all. If you aren’t profitable on a low leverage account, you won’t be profitable on a high leverage account either. Stick to parameters that make it easier to maintain discipline and in turn, keep your account.
Forex psychology – winter is coming
Anyone familiar with Game of Thrones will know the expression “winter is coming”, i.e., darker times are ahead. We think this is a good expression to keep in mind because, in forex psychology, it’s quite common that a run of success will encourage a trader to make decisions based on emotion rather than on their trading system. When the going’s good, a decent trader will know that it won’t last forever and that it’s only a matter of time before there’s a loss or even a series of losses around the corner. Never to let a winning streak go to your head.
Don’t trade when HALT
HALT stands for Hungry, Angry, Lonely, or Tired. In the world of addiction recovery, these are the four “risk states” that are often the background for a poor emotional decision that leads to a relapse. We think it’s extremely good to be aware of HALT when forex trading, and to be mindful of anything that could lead to poor discipline and impractical emotional decisions.
This tip goes hand in hand with the previous one. Forex trading is a journey, not a race. There’s no shame in taking a break if you think your emotional state could get the better of you. If you experience a string of losses, you should also consider taking a break for a few days or even a couple of weeks. This may help you clear your head and avoid the temptation to chase your losses. You can then pick up trading when you’re in a better frame of mind. After all, the markets will still be there for you.
Know when to quit
Once you’ve met your target for the day, whether that’s in terms of trading within a certain timeframe or making a certain amount of trades or profit, stick to your plan and stop. The more you trade, the more likely it is that you make a trade that goes against you, and messes up all of your good work for the day. Why risk this? There’s simply no point. Once you’ve met your target, turn your laptop or computer off. Spend some time with your family, or go and walk the dog. Enjoy the rest of your day.
Keep a journal
Keeping a log of your trades, the reasons why you placed them, and whether they closed in profit or not is a really useful tool. Not only will it highlight what you’re doing well, but it may also help you to spot and eliminate any errors you might be making.
Is your strategy suited to your emotions?
Don’t be afraid to find a strategy that suits your personality. For example, scalping on low-level timeframes can be stressful, because it can require you to stare at a screen and be constantly vigilant. There’s no shame in admitting that this doesn’t bring out the best of you, psychologically speaking. So why not play to your strengths and find a strategy which does? In this case, swing trading could be something to think about instead. This swing strategy is an incredibly easy forex strategy.
Forex psychology & trading environment
The environment in which you trade can certainly have an impact on your trading psychology. Do you trade on your phone, or on a desktop computer? How many screens do you have? Is your trading environment free from distraction? Do you keep trades running while doing other things, or are you flat when you’re at work? This is something else you should keep a record of. For example, you may find that you have a higher success rate when trading at your desk than on the sofa on a cell phone screen.
Pick a suitable instrument
Obviously, the meaning of this one is pretty clear – pick an instrument that you find comfortable trading. For example, many traders have a rule of not touching Gold (XAUUSD) because of how incredibly volatile it can be, and how dramatically the price can spike in either direction.
Forex psychology – backtest
Think you’ve found the best trading strategy for you? That’s awesome! But don’t just believe that it works – prove to yourself that it works. This tip goes hand in hand with practicing on a demo account before using a live account. It’s always best to prove that a strategy is profitable on a demo account before risking real money on it. And of course, if you have proved that the strategy is good, you should be more likely to stick to it, and less likely to lean on emotion instead.
Forex trading is an almighty exercise in self-control and self-discipline. Don’t just trade for the sake of it, or because you feel like you need to. Remember that sometimes, the best course of action is to do nothing. Having no position in a volatile and unpredictable market could prove to be a smart choice.