Are you fit for The Job?
Game of Markets is not for the skittish, timid or shy. By DoubleHit
No matter what you trade having discipline is a fundamental key to being successful. One of the most important ways to improve your success rate is understanding your own trading psychology.
Being a successful trader is not just about your knowledge and understanding of the fundamentals or technical analysis but your trading psychology plays a vital role in the success or failure of your trading.
So what do we mean by trading psychology? Simply put it is your individual psychological traits as well as an understanding of mass psychology. So what are the important psychological factors of a trader which can lead to big successes or even bigger failures?
To many trading FX is an art. With the deepest knowledge and understanding of the market, you may find yourself continuously losing money in bad trades. Psychological factors are integral in trading FX. They can literally “make” or “break you”. In my opinion, the two biggest factors are: Fear and Greed.
So let’s hypothesise, but bear in mind, in real life you are likely to see this happen many times!
You short EUR/USD and instead of going lower the market ticks up and triggers your stop-loss. You have a losing trade and you feel frustrated/angry/sad/ticked off or any number of negative emotions!
You are though, still convinced on your view, and are confident that the market will go lower. But now you are scared of taking another position and you procrastinate!
As you watch the market EUR/USD suddenly turns and heads lower rapidly – exactly what you thought would happen! Once again you become frustrated because you missed this opportunity to recover some or all of your loss or, more importantly, you could have posted a profit! Once again you are frustrated/angry/sad/ticked off and, even worse, feel desperate!
This negative and desperate feeling makes you go short with an even bigger position in an attempt to “make-up” for your loss and the opportunity you missed. To make it even worse, you put your stop-loss far away in case the market behaves as it did the first time.
EUR/USD had already dropped quite a bit and as soon as you entered your short, the market rallies (goes up). Oh no!!! Your position was bigger and your stop-loss too far away. Now you are left with an ugly loss and are even more angry/frustrated/ticked off!
The following is not a definitive list, and not in any specific order, but, identifies many negative factors and how best to deal with them:
- Fear – Sadly, just a couple of bad trades resulting in losses and we become too cautious. We even miss opportunities for which otherwise we would be pretty confident in trading.
- Greed – Just because the market is moving does not mean you have to trade! Do not trade all the time (or over trade) especially if you are not too sure of the markets direction. If you are trading for the “sake of it”/”because you have a feeling” (or overtrading) you are taking too many risks.
- Ego – “I know everything, my analysis is right, I am definitely right.” Even if the trade is going against you!
- Overly emotional (overly optimistic or pessimistic)! As a trader you have to take risks and your success depends on your ability to take risks, but “how much” is something which can decide if you are a “winner” or a “loser”. A perfect balance of optimism with a degree of caution is required.
- Your positions are “your babies” you have an emotional attachment to your positions! A position can always go against you. If you are emotionally attached to your trade you are very likely to hold/keep it. Close a position that is really going against you as soon as possible.
- Maverick or a Rebel? Both of these personalities tend to go against a trend. The adage that “the trend can be your friend” can be beneficial. A trend will always reverse but taking positions with a trend will always have less risk.
So even with the deepest knowledge and analysis the above “traits” mean all your hard work is for nothing because of a lack of trading discipline and/or psychological factors.
A good Trading Discipline
Whatever psychological traits we have we will, at times, make some very basic and common mistakes. A way to control, and avoid these mistakes, is what a good and solid trading discipline is all about. Trading discipline in FX is much more important than technical/fundamental knowledge. Having discipline in trading is the most important aspect and is fundamental for success.
So what factors are key to improving your trading discipline? As before this list is not definitive or in any specific order – but are nonetheless major keys to success:
- Take a position only when you see a strong opportunity. Don’t trade for the sake of trading (aka. Overtrading!). You don’t have to have a position 24/7. Place a trade only when you are confident about the position and you have determined the correct risk/reward ratio.
- Just because you have access to a large number of currency pairs – be selective! Trade in currency pairs you are comfortable with and have analysed. Each pair has its own unique characteristics such as typical spread, average volatility, average daily range and time of day. As the saying goes: “better the devil you know!”.
- Always, always adopt a strict/rigid risk management procedure. The size of your position, the leverage (margin) you have, placing stop losses within sensible parameters (minimalize your potential loss) and, to ensure you do not miss an opportunity, place take profit (limit) orders.
- Consistency is key! A typical pit-fall for many traders that results in losing money is frequently changing trading strategies. This tends to involve frequently changing position size, changing risk/reward ratios, changing trading “system” and trading pairs that you “fancy”. If you want to experiment with different strategies, pairs, risk/reward ratios etc trade on a demo account first or take the time to “back test” your plan. If you continually experiment and change strategies this will only increase uncertainty. Uncertainty equals Inconsistency! And Inconsistency is the major enemy of a trader.
To summarize, a strict discipline is must for successful trading and for that understanding our psychological and personal traits is the first step.