Is Psychology Important in Forex Trading?
The old statistic that everybody throws around is the 95% of traders fail. And if you’ve been around the game long enough you’ve probably been through some stuff that makes you understand that statistic and believe it. Trading is the hardest easy thing that anyone will ever do. There are two common themes among successful traders: The work you do on the charts, and the work you do off the charts.
The chart work is fairly simple. It has to do with understanding price patterns or trading systems. Trading absolutely requires education and experience in price action and trading systems. Chart work also includes risk management principles. Most successful traders are excellent risk managers which means they either put stops in the market or trade small enough to never have a risk of blowing up an account or losing an excessive amount of money that’s too hard to get back. These traders have put in the time and effort to understand what moves markets and how to take advantage of that and make great money doing it.
It’s no surprise that most new traders spend 90% of their time trying to perfect their chart work and trading systems. I would argue, though, that most of the successful traders out there spend a majority of their time on their psychology.
The successful trader spends most of their time on their emotional pychology
Profitable traders are the ones that spend most of their time on the second part, the work off the charts, the psychology of being a good trader. Psychology of trading is thrown around all the time. But what does it actually mean? Well, it comes down to two different concepts:
what do you believe about yourself
what do you believe about what trading itself.
So let’s dive deeper into those two. What do you believe about trading? Do you believe that it’s gambling? Do you believe that to get rich quick scheme? Do you believe that it actually takes time and experience and hard work to become successful at it? Do you believe you DESERVE to be happy and successful as a trader?
The most important part though about trading psychology is what a trader believes about themselves. Almost every successful trader I’ve ever talked to has a deep-rooted self-confidence and a belief that they will come through in any situation. They have an insatiable desire to solve problems and think logically about situations. Successful traders control their emotions by not getting overly excited about winds or overly negative about losses. There is no self-worth involved in taking the trades, wins or losses or the amount of money made or lost. They have a strong belief in the system that they use whether they created it or got it from somebody else, and they execute that system with a strong belief in their success. Throughout the course of my trading career, I’ve seen it over and over again and others and in myself.
Successful traders always have in-depth understanding and experience about charts and markets which has come over a long period of time and they have a very strong psychological advantage because of belief in themselves, confidence and their belief that they can solve any problem and will be successful in the long run.
Think about it like this if you have an overconfident person that doesn’t know anything about trading, they’re going to take excessive risk and maybe win in the short run but in the long run, it’s going to take its toll on their counts, both in their trading capital and their mental capital. Overconfidence has been the ruin of many accounts. It’s the same as “the need to be right”. We can either be right, or we can be successful. They usually don’t go together in this business…
On the other hand, if a trader has an excessive amount of chart knowledge and experience but has no self-confidence and a proper belief in themselves then all of that knowledge will return nothing because they will not be able to make decisions and see them through. Price action and “noise” will always cause them to question themselves when the pressure is on.
While it’s true that successful trading requires both charts and psychology, what a trader believes about themself is the true key to success.