There are several different types of psychological forex traps that beginner traders can be affected by. By knowing what to avoid, and by being able to control one's emotions, beginner traders may begin to take the first few steps towards becoming successful, professional traders.
It is easy to fall into forex market psychological traps, as they are often a result of something being overlooked, overthinking, or simply being unaware of the facts.
The following article will cover the typical psychological traps that beginner traders can fall victim to when they are just starting out. This article will also provide traders with useful forex psychology tips that they can use to avoid these traps and stay on top of their game at all times.
One major assumption that is incorrect with forex trading is the assumption that it will be 'easy' to make continual profits. Basic forex market psychology tells us that we should expect losses when trading on the forex markets, that we should account for them, and that we should make sure that we can cope with them.
That doesn't mean that forex traders cannot be hugely successful in the markets, but even the top forex market traders will tell you that losses are simply a 'part of the game', as well as something that you should 'plan for'.
Just like in the gambling world, one major win on the markets could lead a beginner trader to think that they will win every time, but this is simply not the case. The forex markets are unpredictable, and can often move in directions that even the greatest trading minds cannot always predict.
The Markets Are Not Random
Markets might be unpredictable from time to time, but they are not random either. Market prices move according to the time and values of transactions, which occur within specific time periods. They are affected by news developments, economic data releases, and much more.
All of these things will commonly cause the markets to move either in a bearish or bullish direction, and it's even possible to learn from the past in order to understand the present or the future of the markets.
For instance, if there is a recession looming, traders can view how the markets performed during a previous recession, in order to predict how the markets might perform during the next one.
Demo Accounts vs Real Trading Accounts
A common misconception that forex beginners might make is that their experiences trading with a demo account will match those that they will encounter with a live trading account.
The key thing to keep in mind when transferring from a demo account to a live trading account is that your capital will now be at risk. Your emotions will now also become a factor, because when you were trading with the demo account, you had nothing to lose. When you are trading with a live account, you now have something to lose, because your capital is now at risk. The game has changed, the rules have changed, and therefore, your approach to it must also change.
Now that you are trading with a real trading account, you might experience difficulty in terms of managing your emotions while trading. For example, if you make a major loss, it might be tempting to quickly try to recover your losses with another trade, which would likely lead to further losses.
With a free demo account, you get a chance to establish a winning strategy without losing cash. We offer a risk-free way to try your tactics under real market conditions.
Put simply, your emotions can betray you. In professional trading it is well documented how important it is to ''master your emotions'' in order to be successful. The key element is control, and if there is no attempt made by a trader to control their emotions, they will easily fall into this common psychological forex mind trap.
Emotions such as greed and fear could be considered as forex mind traps, since they cause the trader to act in an illogical manner, which will ultimately lead them to make significant losses in the forex markets.
Greed may lead traders to wait too long when holding a position, because they wish to increase their profits, and this may lead to a significant loss. Fear has a similar effect on traders, but in a different way.
Fear could lead traders to make mistakes such as exiting or entering the market too early, or alternatively, they might simply worry too much about the risk potential of trades, and therefore, may miss out on great trading opportunities.
Moreover, being afraid and overthinking everything could lead a beginner trader to over-analyze their potential investments. By doing so, traders could incorrectly analyze their investments because they might identify potential situations or factors that simply aren't accurate or are unlikely to happen.
Psychological Trading Tips
- Beginner traders should do their research before delving into the forex markets. They should find trading strategies that work for them, and make sure to minimise their trading risk as much as they possibly can.
- Do not attempt to recover your losses by making another quick trade. Stick to your strategy. If you are continually making losses without any wins, take some time to revise your strategy and figure out where you might be going wrong. For instance, you might need to simply change your strategy, or perhaps you should consider trading in a different trading window.
- When holding a position, ask yourself what the reason behind the decision to hold the position is. If you find yourself with a negative answer, consider closing the position.
- Don't be afraid. Trust yourself, trust the strategy that you are using and try not to worry about losing. Losses are a part of everyday trading, but allowing yourself to be scared of making losses will prevent you from identifying excellent opportunities to make profitable trades.
- If you are nervous about a trade, perform some more extensive research. Try to match your reasoning against facts and figures. You could be right, but you could also be very wrong, so it makes sense to refer to statistics and actual facts, rather than relying solely on your 'feeling' about a trade.
- Make sure that you have a sufficient amount of capital that you are willing to risk. If you don't have enough, and you lose that capital, you might be tempted to invest money that you cannot afford to lose, and that is the beginning of another psychological forex trap.
Therefore, it makes sense to come prepared by possessing a decent amount of capital that you plan to trade with. Set yourself a limit and stick to it. That way, if you do make losses, although it might be a bit frustrating, it won't be devastating to you either.
Trading On The Forex Market
Now that you have a better understanding of forex trader psychology, and you are aware of the various forex psychological traps to avoid, you should now be ready to apply what you have learned to the live forex markets.
With MTrading, you can create a free demo account on the MetaTrader 4 trading platform that you can use to practice your trading strategies, before you begin to use them in a live trading account. There are no psychological traps here, only the opportunity to become a successful forex trader!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.