Today our article will be discussing the psychological aspect of trading.
The foundation of trading is interconnected
As most traders know, trading is finding the correct equilibrium of proper risk management, good analysis and trade strategies, efficient money management, and a balanced (trading) psychology. A trader cannot be successful if one of the elements is not sufficiently developed. Similar to a building, if one of the walls is not properly built, the entire structure might collapse. Our trading is the equivalent of that building and our risk & money management, strategies and psychology are all integral part of that structure.
As mentioned earlier in this article we are focusing on the psychological part of the structure. However it should be clear that everything is interconnected. Any particular trading strategy only works well for traders who have the matching psychology. A good psychology only has positive effects when proper risk management is used. As you can see, all are interrelated.
The field of trading psychology is vast and many aspects can be discussed. The item I would like to focus on today is fear. Why on fear.
Because I believe that the 2 major causes of traders to fail in Forex trading are:
1) Improper risk management (over risking)
2) Fear of the market, fear of trading, fear of losing
Let us analyze where fear comes from. Fear is an emotion or a feeling. In trading, fear is often caused by a thought process.
To succeed every trader should check what their internal thought process is.
a) Is it positive, negative or even destructive?
b) Are you seeking to learn from trading and the market?
c) Are you convincing yourself that you are right and the market is wrong?
d) Are you focused on learning in small steps with specific, measureable, achievable, realistic timely (SMART) goals?
e) Are you telling yourself that you can be successful or are you using self destructive talk by confirming to yourself that trading and the markets are tough, crazy and will never work?
All humans have internal thoughts (and doubts), not only traders of course. An important thing to realize is that our actions are connected to our thoughts. Or in other words: our attention, actions and focus go to the area of our thoughts. So if we think negatively, we might be focusing on it as well. Our view of the world is then seen though a negative lens. The opposite holds true for positive thoughts.
Fear is enemy number 1 for a trader
Therefore a trader might want to ask themselves: am I thinking in fear and failure when approaching the market? If you think fear, you will act in fear.
Living in fear of the markets solves nothing. A trader must slowly replace fear with a balanced confidence.
Traders who get rid of their fear in uncontrolled manner might not fare well. This can happen when a trader is either very unsuccessful or very successful.
a) If very successful, the fear is then replaced by arrogance.
b) If very unsuccessful, the fear is replaced by aggression.
–>Revenge trading is then a likely outcome, read more here.
The best thing a person can do to succeed in trading is to have a positive and hands on approach towards the market, trading and learning.
By having a positive can do attitude and openly analyzing your thinking process, your attitudes and actions in a day will start to constructively work on making you a better trader. This will replace fear for a balanced confidence.
Trading our views of the market
No matter what anyone says, I do believe that we all trade our view of the market. Our analysis is always subjective. And our trading is most of the time subjective too. There are exceptions where traders use quantitative data for trading. Here too, however, a trader is subjected to the choice of sticking to the rules or adapting the trade to current market conditions. Even if the trader has the discipline to follow rules to lets a robot trade their account, then, an algorithmic approach might work well in one year and horrible in another. This too can be quite an emotional roller coaster.
We traders filter the information and price action we want to see and use. This is called our paradigm. Our character, our attitudes, our past, our culture, our experiences and our beliefs all influence that paradigm. They influence our view of the world. They therefore also are an integral part of how and what we think of the market and how we approach it. That belief system will either allow us to succeed or prevent us from reaching our goals.
The good news is that we always can change our attitude towards the market and therefore change the paradigm we use to see the market. That new view might make it possible for an entirely different mindset and approach to trading and to the markets.
With a fresh new positive mind set a trader will become totally different:
1) They will able to see more and different kind of opportunities never seen earlier.
2) With the absence of fear, they will also be able to handle and judge that information in a confident manner.
3) There will also be no temptation to tinker with risk management. Why over risk or under risk at any point in time when you know that the market provides plenty of opportunities.
The individual will become a well balanced trader. They understand that their market interpretation will be both right and wrong, but their confident approach to trading will allow them to have fun and achieve better results.
In next week’s article, Enemy Number One Fear – Part 2 we will analyze the differences between a trader with fear and a trader with confidence. We will also provide a detailed to-do list how a trader could improve their thinking process in such a way that it is streamlined and working in favor of you – not against you.
With those final wise words, I wish you Good Trading and a great Friday and weekend!
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