While many programs teach how to trade foreign exchange (FOREX), perhaps not enough provide enough training in the area of trading psychology. It has been said that the greatest enemy in trading is not the market but the trader himself. Why should the role of trading psychology even be considered? This article explores the reasons.
Human beings are naturally subject to emotions. These emotions include, among others, happiness, fear, excitement, anger, remorse and anxiety. As traders, we are certainly subject, and often succumb, to the foregoing. What must be realized by traders is that these emotions can have a profound influence on our trading decisions and ultimately our trading results. If these emotions affect our trading, they must absolutely be placed in the proper perspective.
Let us start with the proposition that if one trades long enough there will be both winners and losers in the trading record. Winning invariably brings happiness and excitement. Losing, on the other hand, often results in a type of trader’s remorse akin to buyer’s remorse, i.e. a feeling of “I wish I had not done that transaction”. Depending on individual emotional makeup, there will be different reactions to the same set of circumstances. For some, a large winning trade may mean an invitation to take greater risks for no other reason than the feeling of being invincible.
A properly devised trading plan may, in fact, call for increased risk, albeit within reasonable money management guidelines. But, to take greater risks as part of an emotional response is potentially disastrous. A similar danger exists with certain emotional responses to a significant losing trade. Feelings of fear and trepidation may take over to the point that a trader may refuse to trade at all or with much less capital, risk or regularity.
No suggestion is made here that traders must be totally devoid of emotion to be successful. However, a well-laid trading plan must de-emphasize the emotional in favor of good research, money management, timely execution and reasonable risk. Emotion should never be the essential driving force of the trade. The key is remaining focused on the game-plan at all times, even after a losing trade. This may be difficult at first for the beginning trader, but like everything else in the trading arena, it becomes easier with practice.
The starting place for the trader in developing a good trading psychology would be an honest introspective assessment of how he or she reacts to certain situations. Then, by resolve, ensure that the specific emotions present will not derail the steps of a well-planned strategy.
Copyright 2007
Sandy Robinson, J.D.