Trading psychology

Trading psychology

The psychology of trading plays an important role in the markets. It's our emotions that dictate our decisions and make us a good or bad trader. To be a good trader, it is not enough to feel the market well, you also have to know how to let your profits run and cut your losses . It sounds easy, but controlling your emotions is often harder than you think . All actors are indeed subject to their emotions and especially two that seem to me to be the basis of each decision: fear and greed . Each individual has a behavior of his own but he can not escape his emotions. He can, however, learn to control them.

The fear of losing

Everyone is afraid of losing , even if everyone reacts differently to each situation. That's why most people find it difficult to cut their positions when they are losing even if their trading strategy is pre-established in advance. We often say "it will go up" or "I leave, I see how it evolves" and it is often the best solution to lose a lot more! This is for me the main reason for the ruin of some individuals, who have not been disciplined enough to respect their trading plan . Better sometimes to cut a hand rather than an arm ... Knowing how to cut one's losses is difficult, but do not forget that your capital is your working tool . Without capital, you can not do anything. That's why we have to preserve it. It is therefore advisable to risk a predefined percentage of its capital on each operation. This percentage may for example be 1%. It does not seem like much, but when you make multiple trades, your overall risk can grow very fast. Not risking all of your capital on 1 trade allows you to cut your losses more easily. There is a big difference between losing 50% of your capital and losing 1%. One can easily understand that taking one's loss out of a 50% risk of one's capital is not an easy decision to make. It is by doing that that we come to say 'Tampis, I'll see what happens' or the famous 'will come back one day'. If you want to be a competent trader, ban that kind of sentence from your language! The solution is to risk a minimal percentage of its portfolio on each trade and therefore once your risk determined, to establish your trading strategy . This necessarily involves a stop loss. We can not repeat it enough, a stop loss is essential on every operation !! The stop loss allows you to avoid sticking to your screen all day to monitor your trade, and thus removes some of the stress of trading. But, the stop loss also makes it possible to determine a point from which it is considered that our scenario will not be realized. The level of the stop loss must be determined before the operation and must not be changed during the trade, except if the trade goes in the right direction and in this case, it can work in stop motion. Moving your stop on a losing trade means being confronted with your emotions and therefore the fear of losing. So that your loss does not materialize because of the closing of the trade, the fear will make that you will modify your stop so that this one will never be reached and you will say to you ' it will come back to me someday. It is then the fear of losing which directs you and you run to your loss by functioning thus. Make no mistake, it does not always come back.

Greed will lead to your loss

Fear is not the only factor that guides your decisions, there is also greed . Everyone believes that it is possible to quickly earn a lot of money especially on the Forex because of the important leverage that is offered to you. What people forget is that significant leverage also means significant risk. Certainly, on a stroke of luck, it can work, your trade is going in the right direction, here you are rich and again. Let me explain. First, people who use leverage too important often have no stop loss because their account is too small to allow to place a stop correctly. Play with $ 1,000,000 on the EUR / USD ($ 100 per pip) and a $ 1,000 account for example and your margin of maneuver will be only 10 pips (and still I do not count the spread). Rather tight to place a stop! If the trade goes the wrong way, most of your capital is lost. The risk is huge. But that's not all because in the event that the trade goes in the right direction, your emotions often play you a trick. Let's continue with our example. If the EUR / USD goes 3 pips in your direction, you go out trade and you then win $ 300. Great you say, + 30% in 1 trade! However if we think a little, your risk was to lose $ 1000 to make $ 300 (go $ 500 to be nice). From a mathematical expectation point of view, was the game worth the candle? It's hard to say but I answer for you: NO !! Yet this is what we see regularly on the Forex. Trading with too much risk will always make you act stupidly . I'm not afraid of the word, if your Forex perspective is to do that, then go to the casino! Trading requires discipline (follow a structured trading plan, cf money management ).

Let your gains run and cut your losses

I reassure you all the same, it is possible to earn a lot of money on the Forex and if you are good, it can be done quickly enough. The important thing is, as I said earlier, to let his gains run and to cut his losses . To cut its losses, I already told you about it (stop loss, money management .). In terms of letting your winnings run, it must be taken in the sense, do not cut your position until your goal has been reached or until your stop has been typed (if you play the trends and so you operate in hitchhike). Too many traders take advantage too quickly once they see the deal in gain. Respect your trading planwhich has been established before entering the market and especially do not hesitate to strengthen your position if the trade goes in the right direction. For example, when moving a stop, you can open a new position. So if the trend continues, you can win a lot. If you play goal setting, take a risk / reward ratio that is interesting. All of this will ensure that your winning positions will largely offset your losing positions. And know that it is very possible to get rich on the Forex by performing more losing than winning transactions!