PSYCHOLOGY IN FOREX TRADING
FOREX TRADING PSYCHOLOGY
Recently, a friend requested I give a talk on forex trading psychology, needless to say it wasn’t necessarily a request. The matter was already decided, I had to assume the responsibility of preparing for the talk.
I have spent the better part of January 2024 trying to figure out and generate content on this subject matter. I have come to a conclusion; market psychology is the mother of trading psychology. We tend to view individual trading psychology independent of the market, our trading results can confirm this.
Allow me to develop the conceptual framework that leads to my conclusion. For the better part of this article, I will advocate for market psychology as opposed to trading psychology, a matter of perspective.
Psychology by definition is the study of behavior, ideally with the intention of increased understanding. I will also share that environments do dictate behavior. Therefore, market psychology(environment) is superior to trading psychology. In other words, the behavior of the market determines the behavior of traders.
With this framework, would it be ideal to study market psychology? Ultimately, we will understand ourselves better. In my experience, I have learnt that the market is both mean and generous in equal measure. It depends what side you receive. Is it possible to consistently receive her generosity? Yes, it is. How do we do this?
Firstly, we need to understand and accept that;
- The market doesn’t care about you or your goals.
- The market doesn’t care about your desire and timelines.
- The market doesn’t care that you use indicators or whatever trading style
- The market doesn’t care that you use technical or fundamental analysis
- The market doesn’t care about your emotions, it is not in a relationship with you.
The market doesn’t care.
The market only cares about one thing; efficient price delivery.
Reason would dictate that we need to approach the market without ANY expectations. Submit to the market, seek to learn its price delivery behavior (psychology) and then it shall reveal itself to you. Gradually, the market modifies your behavior and mindset. Therefore, consistent exposure and pursuit of market psychology builds and modifies individual trader psychology.
Time and dedication are the answers to figuring out market and trader psychology. Time, is a trader’s greatest weapon or undoing. For example, we know, every break of structure is followed by a correction. The purpose of a correction is to remove previous disequilibrium (imbalance and inefficiency) before continuing with the main trend.
What we don’t know is how long a correction will take or when the trend will change. Often times, the state of not knowing has caused may traders to act irrationally consequently blowing accounts.
If we know this, then why do we fail? We project our feelings and expectations on the market. Recall, the market doesn’t care.
Repeatedly court the market, sit and ask what is going on, why is it happening and how is it happening, the market will answer and increase your understanding and depth of psychology.
When you do the following, market psychology has modified your behavior (psychology);
- You no longer chase after trades. Instead, you let trades come to you no matter how long it takes.
- You learn to differentiate between lost and missed opportunities.
- When you learn that high risk doesn’t necessarily equate to high return.
- Your objective is risk minimization and not profit maximization.
- When you accept that two people can see the same charts differently.
- Its about the quality and not the quantity of trades.
- When you learn that less is more, and slow is fast
- Excessive leverage is not your friend.
- Spreads and market manipulation don’t make you better or worse.
In conclusion, it doesn’t matter what technique you use; market psychology is inevitable if you must succeed in your journey in forex trading. It is the case of what comes first, the chicken or the egg.
