The purpose of trading Forex is simple: “To Gain An Advantage.”
Although there are various ways you can improve your chances of building your capital, one of the most important steps is to understand the psychological impact it has on the way you make decisions.
According to the efficient market hypothesis (EMH), financial markets truly rational, as market players always make the most logical decision, in order to achieve the greatest results.
However, A ‘Trading Psychology research shows that although correct in their prediction of more than 50% of the time, traders tend to lose significantly more money than they win. This is because, in reality, none of the traders are all really rational.
We are all products of our environment, our decisions, and our psychology. This means that in order to act rationally and make the most profitable decisions, it is important to understand your mindset and how it affects your time spent on financial market trading.
There are so many different aspects of the human mind that can influence the decision-making process. But I’ll look at two key aspects of psychology who can help you to improve your Forex trading performance.
Here are the DEETS…
- Cognitive biases
1: The Cognitive Biases
Studied cognitive-behavioral biases at work in the subconscious part of the brain and inform decision-making. They are mental shortcuts that can cause involuntary responses to certain stimuli.
For example, the availability bias is a mental shortcut that prioritizes the information more accessible. This can lead to trading based on a piece of completely false information, which will increase the risk of failure.
Another example is the loss-aversion bias, which is the desire to avoid losses over and above the desire for greater profits.
Of course, some risk awareness is absolutely necessary when it comes to trade, but the loss-aversion bias can actually lead traders to hold on to their losing trade for too long – from a reluctance to accept losses – though it exacerbates the situation.
Often, traders are really aware of cognitive biases that affect them, which is what makes them so destructive trade performance.
By educating yourself on the cognitive biases that may affect you and be proactive about the information that you use in the pre-trade analysis, you can begin to limit their influence on the performance of your trading.
There is a famous saying among traders that the ‘ market is driven by fear and greed’. Although this may be the most prevalent emotional impact, there are many emotions that can affect the performance of the trader.
For example, hope can be a positive and negative influence. While it is important to maintain a degree of optimism when trading, it is important to not let go this far.
We can see the negative impact that expectations can have on data IG – it shows that traders hold on to them for a too long trade on the expectation that they will turn around, which eventually led them to take more losses.
A way to improve your trading performance and limit the impact of emotion is to keep a trading diary. This means you can be aware of the emotions that you feel, acknowledge them and learn from them.
Behavioral finance is no longer reserved for academics and professional traders and should form an important component of any trader’s toolbox.
Finally, if you think that you just can’t get a hold on to your emotions then you should use trading software. There are numerous automated trading platforms out there. All you have to do is a little bit of research and I’m sure you’ll find the one you’re looking for.