The following is a guest blog post:
Although many consider the Foreign Exchange Market or Forex to be the ingrained mark of modern society, history reveals that the act of trading is as ancient as time itself. For examples, in Ancient Byzantium, currency traders also referred to as money-changers, would help citizens in exchanging their money for a certain fee (i.e. commission).
However, with the emergence of a fully globalized market, which encompasses assets (e.g. gold, silver, and other precious materials) and derivatives (i.e. futures, options, or securities), the act of trading has evolved from mere peddling to understanding and conceptualizing higher mathematics and the ability of getting into the right frame of mind.
Trading, like many other disciplines, is not solely ruled by steadfast mathematical principles, but also by psychology. There are numerous examples of how seasoned traders managed to lose their winnings, acting upon instinct, disregarding the signs in the process.
And so, in this article, we will discuss, at length, the psychology behind the act of trading, and what psychological traits a trader must master to up his/her game.
Trading Psychology – Between Myth and Fact
As you very well know, psychology is commonly regarded as a borderline discipline, graciously threading the line between art and science. However laconic this fact may seem, psychology has aided us in explaining how various states of mind are crystallized and, most importantly, how to coach ourselves into having a specific way of thinking.
Albeit trading is anything else but the foster-brother of simplicity, psychologically speaking, we consider it a mixture of mathematics, macro economy, and, evidently, computer science. So, trading is part psychology and part technical know-how – this is the undeniable truth of this disciple and something we must assimilate and internalize if we hope to succeed.
The forex trade for beginners course is a steadfast way of getting the grasp of both the technical and psychological implications of this pursuit.
Let’s begin by enumerating the psychological traits every Forex trader should master:
- Risk management.
- Trading Discipline.
- Dealing with Loss.
- Emotional Neutrality.
- Presence of Mind.
- Capacity for Self-evaluation.
We will detail each item in the above-mentioned list and also tackle more technical aspects of the trading profession.
Risk management, by definition, is one’s capacity to understand or rather to assimilate that an action, however small, has one or more implications and that they are now always favorable. Why is considered risk management a vital lesson for traders?
As you very well know, the Foreign Exchange Market features various assets – some of the can return a steady and sure profit, while other can be ‘moodier’ (i.e. are more volatile). This is the point where the trader must come to a decision: will he stick with an asset, a stock, or an index which brings him a steady, yet small profit, or will he throw himself to the lions, in an attempt to reap a bigger win?
Risk management is one’s capacity to know when to take the leap and when to retreat to safety – do keep in mind that a risk-taking mind frame is not always the correct approach and could easily lead to one’s ruin.
Professional traders will accept, by default, that each action has its risk and, of course, its gains. The middle ground is to figure out if that specific course of action is worth taking or if it’s a financial dead-end.
Apart from a sound risk management strategy, discipline is also an essential part of trading. Without it, traders would be inclined to act on a whim and to repeat the same disastrous mistakes. Basically, they would be stuck being neophytes for an indefinite amount of time.
Discipline is a derivative of experience, meaning that one cannot hope to attain discipline without being confronted with various scenarios. Victories, as well as defeats, go together in the same cauldron, making the trader wiser and more focused on details.
In trading, discipline refers to concocting strategies, testing them out on the field, and sticking with things that usually yield a steady profit. For example, in the pairs trading system, having understood that the trend favors a certain pair, the trader will evidently choose to go with the trend, rather than to experiment.
However, this should not discourage you from trying out new things. Following the herd, so to say, should be considered a safety net and not a trading philosophy.
Dealing with Loss
An inherent part of the Forex trading profession and, with obvious implications is risk management, is the ability to deal with loss. Do keep in mind that even George Soros, Stanley Druckenmiller or Paul Tudor Jones, prominent figures of this profession, had their bad days, and learned to deal with it and move on.
What we’ve meant to say is that in every bid and every call, there resides the possibility of losing. When and where this occurs, the decision you must take is quite simple: either you surrender, take what you have left and retire or accept the consequences of your actions, draw your conclusions, and ensure that history doesn’t repeat itself.
This is just one of many examples which prove that Occam’s Blade becomes obsolete when it comes to human determination.
Although it would be against the human nature to totally repress emotions, one of the most vital lessons a trader is compelled to learn is that, in order to succeed in this profession, you should not attach any emotional value to your actions.
It matters not your emotional attachment to a certain company or trading strategy – out there, in the field, all that matters is how the numbers play out and your capacity to make the right call.
When playing the market, imagine that you are a coder trying to develop software. It doesn’t matter how hard you hit the keyboard or yell at the computer; if the code is badly written, emotions will not make it work.
Focus on the present, analyze the number, and curb your enthusiasm. It’s no easy feat, but mastering this lesson will bring you one step closer to becoming a professional trader.
Presence of Mind
Trading on the foreign exchange market can become quite a handful, especially since things play out very fast. In light of this statement, the presence of mind or the ability to be at the right time and the right place can make the difference between a sounding victory and a sulky win.
This is why it’s essential for a trader to learn that day-dreaming can result in losing the chance of a lifetime. Similar to all the other traits we’ve discussed so far, the presence of mind is also a derivative of experience, something you only learn on the job.
Capacity of Self-Evaluation
Progress can only be attained by comparing the ‘now’ with ‘then.’ In other words, you will be able to improve your Forex game only if you retrace your past actions. One of the commandments of science is to doubt everything; by putting the things you thought you knew under the looking glass, you will, perhaps, discover new aspects and new depths.
Self-evaluation is beneficial to improving your trading strategies, discover new ones, and, of course, learning about what type of trader you really are. Time-tested approaches are essential, but not immovable.
Such is the rule of the foreign exchange market to shift constantly and, it’s in your best interest to find out new ways to keep the pace.
Forex trading might be considered a science by many, but one cannot rule out the human factor from this equation. Technical know-how along with developing or improving a certain frame of mind are the building blocks of the modern trader, an emotionally detached individual, who values discipline and professional introspection above everything else, but how is unafraid of loss or conducting experiments.