Search ForexCrunch

When it comes to forex trading, confidence is high, overconfidence, however, is a recipe for disaster. Overconfidence typically happens when a trader, more often a novice, experiences a lucky streak in a series of winning trades. Feeling as though their lucky stars are with them, their overconfidence will make them feel like professionals, and they often get tempted to quit their day jobs to start trading Forex full time. This type of thinking leads to a pattern of overtrading and taking on excessive risk. Eventually, as their lucky streak starts to pull into reverse, reality steps in, with devastating outcomes.    

Forex psychology plays a huge role, with the achievement of successful trading being attributed to those who can contain their emotions. Novices are particularly susceptible, with the more “fortunate” ones being those who lost, to begin with, rather than those who succeeded. Those novices that lost in their initial attempts to trade learned very early on that Forex trading is risky and needs to be approached with caution. While those who experienced ‘beginner’s luck’ become over confident and put more money than what they could afford into their trading account. Without taking due diligence, they put their money in a bad position and continue to leverage their trade, still confident that the situation will  turn around in their favor – eventually to detrimental results.

Even for more experienced traders, one of the biggest challenges is accepting the nature of the trading process where the most significant hazard that they need to overcome is themselves. All too often after a winning streak, they’ll strike out on a losing trade and then the typical emotional reaction is to blame themselves for the loss. A winning streak doesn’t necessarily mean you won’t go on a losing streak, but a losing streak doesn’t mean you should give up trading altogether. Sometimes, all it has taken is one trade to make or break a trader, but in reality, one trade doesn’t mean anything at all.

The secret to mitigating the effects of emotive reaction is to think positively, develop a trading plan, stick to it and accumulate some experience.

Put aside the cynic in you, positive thinking works. Your mind creates the reality that you live in and positive thinkers, naturally create a positive reality around them. Imagine the following scenario: At the end of five days a trader looks back to assess their results which totaled +$100, -$50, +$200, -$60, -$40 for each consecutive day. A negative outlook would lead the trader to conclude that he performed badly because he had more days when he experienced a loss than days when he experienced a win. He will blame it on the fallibility of his trading strategy or the inconsistencies of the market. A positive trader will realize, more accurately, that when you combine all these results, an overall profit has been made of $150. The market is what it is and his trading strategy does work after all.

A well developed and strong trading strategy is key. It will enable you to identify at what point the market needs to be at for you to buy and sell a trade. Consistently keeping to your trading strategy will make it easier for you to monitor the market, keep your trading style structured and not a sporadic gamble. Importantly, it improves your ability to spot good opportunities, as much as your ability to identify when not to trade.

Underlying the value of your trading strategy is how much you trust it, and for your confidence to be ‘air-tight,’ you need to ensure that it is well developed. This is where the elements of research, skill, and experience come into the picture. Practice your trading style on a demo account where the stakes aren’t high, analyze the charts and follow the financial news. All this will help to inform your trading strategy so that you can trade at your best instead of trading on those lucky stars.