The Swiss proverb above couldn’t be more true for us traders. As you may know, many forex traders (and their accounts) have suffered because of greed. In fact, this is how the saying “Bulls and bears make money; hogs get slaughtered” came about.
No other animal embodies greed better than the hog, and in the trading business, the markets show no mercy to hogs.
Mastering the psychology of trading is one of the most difficult and undervalued parts of learning how to trade stocks, whether you trade stocks part-time from home or for a living. Even though there are a lot of books, websites, and other resources about trading strategies for the stock market, not much has been written about the psychology of trading, especially for active short-term traders.
This could be because most technical traders, like day traders and swing traders, are more interested in math and numbers and less interested in “soft” subjects like psychology. But if you don’t pay attention to the psychological side of trading, it’s almost certain that you won’t learn how to be a consistently profitable online trader. When stock traders and investors need help with this topic, it’s only after they’ve lost all of their money and hit rock bottom. But in this article, I’ll help you learn more about trading by talking about the most important emotions to be aware of and how to avoid the most common mistakes that investors and stock traders make when they’re just starting out.
Many stock trading websites suggest that new swing traders “paper trade” in a simulated account to gain experience. This may help you learn to spot technical patterns and entry points, but you can’t simulate the psychological side of a trade without putting your own money at risk. A short-term trader must go through hundreds of trades to learn his own psychological strengths and weaknesses in order to master the psychology of trading.
As a trader or investor in the stock market, you have to fight a constant battle between the need to think for yourself and the urge to go against the market’s flow (the “herd” mentality). Often, an investor’s stock pick idea is right, but the trade loses money because the investor (the “individual”) believes so strongly in the idea that he goes against the strong momentum of the stock market (the “group”). This usually happens when an investor or stock trader has the right idea to buy or sell a stock, but the market timing was off.
Stock markets only change direction when the “group” decides to do so, not when a single trader thinks the change should happen. John Maynard Keynes, a well-known economist and speculator, once said, “The market can stay irrational longer than you can stay solvent.” Oh, how true this is! Traders and investors who thought otherwise litter the streets.
If you trade on momentum in any market, the technical trend is always on your side. Fighting it will only make things worse in the long run.
Greed, fear, hope, and regret are four psychological states of emotion.
Most of the decisions people make in any market in the world are based on four emotional states. They are want, fear, hope, and regret.
Since the stock market is made up of individuals who tend to act in similar ways, a group is formed. During a trend, only the group’s opinion matters, but it is up to each trader to spot the subtle signs that a market is about to change direction.
There are hints, but they are not obvious. A skilled technical trader stays out of trouble by being aware of and well-versed in these emotions. This gives them a way to spot their own weaknesses. We will now look more closely at these emotions and show how they can affect a trader’s ability to consistently make money.
Greed is usually defined as wanting too much money and things.
In trading terms, it means wanting a trade to make you a huge amount of money right away, even though that’s not possible. When greed sets in, all a trader can think about is how much money they have made and how much more they could make if they stay in the trade. But there is a big problem with this line of thinking. Before a position is closed, there is no profit. Until then, a swing trader has only a POSSIBLE profit (aka. “paper profit”). Greed can also make people ignore good ways to handle risks.
The results of our poll show that traders and investors struggle with “fear” more than the other three emotions we talked about in this article.
Fear is a disturbing feeling that comes from a sense of impending danger and causes a survival response. This is true whether the threat is real or just in your head.
Fear is probably the strongest feeling a person can have. When traders are scared, they will sell a position no matter how much it is worth. Fear makes people panic, and panic makes people make bad decisions. Fear is a way to stay alive.
During market panics, some people have jumped off of buildings. On the other hand, no one has ever jumped off a building out of greed. From 1983 to 2007, the Dow Jones Industrial Average rose from 1,000 to 14,200, but it only took two years for it to lose half of its value (2007-2009). That’s a dramatic way to show how powerful fear can be.
Fear is a good feeling if it keeps you from making a bad decision. If, for example, a stock pick reaches its predetermined stop price and a disciplined swing trader gets out of the trade, the fear of losing too much money keeps the trader from going bankrupt. But fear can hurt a trader if they don’t enter a good setup because they’ve lost a few trades in a row. Even if a trader has lost money in the past, that doesn’t mean he shouldn’t be afraid to trade again. This is why we have plans for trading. The goal of trading systems is to take the emotion out of trading. If you’re afraid to enter a good setup, there’s no point in even trading.
When the market is in a state of panic or fear, a swing trader shouldn’t try to figure out why they shouldn’t get out of their positions or come up with excuses. When there is a lot of fear and panic, the best thing to do is to get cash. It’s a waste of time to listen to the news, the government, stock experts, or other traders’ opinions. If the market (also known as “the group”) is panicking, it’s best not to go against the trend. The group always comes out on top. You don’t have enough money to keep the market from falling on your own. It’s pretty easy… When banks, mutual funds, and hedge funds decide to sell their positions, the market will go down (and vice versa). Don’t go where there is fear! When in doubt, get out! One of the most important things you can do to improve your online trading education is to really understand the power of fear.
Hope is a feeling of wanting and expecting something to happen. It is when a person wants or wishes for something to happen.
When it comes to trading, hope may be the most dangerous human emotion. Hope is what keeps a trader in a losing trade after it’s hit the stop. Traders often don’t take their winnings when they should because of greed or hope. When a stock is going up, traders often stay in the trade “hoping” to make up for their past losses. Every swing trader hopes that a losing trade will somehow become a winning trade, but the stock market is not a charity. This way of thinking is risky because the group (the stock market) doesn’t care what you want or what’s best for you. Rest assured that the market will take your money when you start to think in terms of hope.
Regret is a feeling of sadness or disappointment over something that has happened or been done, especially when it involves a loss or a missed chance.
It’s clear that this feeling is bad for you. It’s normal for a stock trader to feel bad after making a bad trade or missing a good one. But as a trader, it’s important not to think too much about trades you lost or missed. If a trade costs you money, you should figure out what went wrong and move on. Aside from the lessons that can be learned by evaluating each trade, there is no point in spending more time regretting the decision to enter the trade. It’s also in our nature to feel bad when we miss a chance. If you miss a good trade, you have to move on to the next chance to make money.
When technical traders let regret control their thinking, they tend to “chase trades” in the hopes that they can still make money on the position by getting in well above the trigger price. The problem with this way of thinking is that the trade no longer meets the criteria for good trade management in terms of the reward/risk ratio. For example, if you enter a trade 1 point above the trigger, the possible gain is 1 point, but the possible loss is also 1 point. This makes the ratio of risk to reward 1 to 1. Remember that we like trades with a reward-to-risk ratio of at least 2 to 1. But if the trade had been made at the right trigger price, the ratio of reward to risk would have been 2 to 1. Successful and profitable online traders learn to train their minds so they don’t think about things they wish they hadn’t.
This diagram does a great job of summing up all of the emotions I’ve talked about in this article. Each of these emotions is a driving force behind price changes in every market in the world.
What is greed?
The Merriam-Webster definition describes greed as “a selfish and excessive desire for more of something (as money) than is needed.” Sound familiar?
Let’s face it, it’s our desire to acquire handsome returns that drives us to trade, but this desire becomes unhealthy–even dangerous–when it is EXCESSIVE.
That is why greed is often considered the most dangerous emotion for traders; even worse than fear.
Fear can paralyze you and keep you from trading, but your capital is preserved for as long as you keep your hands in your pockets. On the other hand, greed PUSHES you to act, in ways and at times when you shouldn’t; that’s why it is dangerous.
The dangers of greed
Greed prompts you to act irrationally. For traders, this usually comes in the form of overleveraging, overtrading, chasing the markets, or holding on to trades you know you should’ve exited long ago.
When you think about it, greed is not that different from alcohol; it can make you act foolishly when you have too much in your system. When it comes to a point that greed clouds your trading judgment, you are practically drunk with it.
Like many other worthy endeavors, overcoming greed requires a lot of effort and discipline. It isn’t easy, but it can be done. It’s all a matter of taming your ego.
You will have to admit and accept that you won’t make the right call every time. There will be instances when you won’t catch the market’s full move, or times when you will miss a nice setup altogether.
But that’s just how trading goes. When you accept that the market is bigger than you, and that you’re bound to make mistakes, then you’ll be more focused on following your trading plans instead of succumbing to greed.
A lot of successful traders have said that they’d rather be lucky than good. For them, it’s better to attribute success to luck than their own skills.
It might not be good for the ego, but it’s definitely good for your trading psyche. And that’s probably one of the secrets of trading.
Emotions in Forex Trading
Whether you trade as a hobby from home or as a full-time job. The psychology of trading is one of the most difficult things to master. Some important, but often overlooked, parts of learning to trade forex. While many books, blogs, and other sources explain how to trade on the forex market.
There isn’t much written about how emotions affect forex trading psychology. Especially aggressive short-term traders. Here are a few bad emotions that can hurt your growth as a trader. Profit that you should never make and should always keep an eye on.
Traders’ psychological aspects
This might be because most traders use technical analysis. As an example, day traders and swing traders. These are more interested in technology than in “soft” subjects like psychology. But if you ignore your emotions when trading, you will almost certainly fail. Learn how to trade online consistently well. Only when forex traders and investors have spent all the money in their brokerage accounts. Also when they’ve hit rock bottom do they ask for help?
Many websites about forex trading tell people who are just starting out to “paper trade” in a simulated account to learn more. While this is a good way to learn to spot technical trends and entry points, it isn’t the only way. It’s hard to imitate the mental parts of a trade without putting your own money at risk.
A short-term trader needs to do hundreds of deals to figure out what his psychological strengths are. And limits to be able to control your emotions when trading.
Trader Psychology: The “Individual” and the “Group”
As a trader or investor on the forex market, you must always find a way to think on your own. With the desire to avoid going against the market trend. Often, even if an idea for a forex pick is correct. Because the investor is so sure of the trade’s good qualities, he or she will lose money on it.
That he doesn’t like how fast the forex market moves. When an investor or trader in foreign exchange has a good idea to buy or sell a forex. But because the timing of the market as a whole is off, this is what happens. Forex markets only move in one direction or the other. When the “collective” decides, not when a single trader thinks it should happen.
How Things Work
As a momentum trader, the technical trend is always your friend in any market. Fighting against it will only lead to losses in the long run. There are four psychological states of emotion: greed, fear, hope, and regret. In every market in the world, there are four emotional states that most people make decisions based on. Fear, hope, regret, and greed are the four.
Because the foreign exchange market is for people. When people tend to act in similar ways, they tend to form a group. During a trend, only the opinions of the group matter. But it is up to each trader to notice the small signs that a market is about to change direction.
There are hints, but they aren’t easy to see. By letting a smart technical trader see where the market is weak. A smart technical trader can get out of trouble by being aware of and understanding these feelings. We’ll talk more about these feelings today. As well as examples of how they affect a trader’s ability to make money consistently.
Emotions that can hurt your Forex trading: GREED
Greed is the most dangerous emotion in forex trading, and every trader should be aware of it and do everything they can to avoid it. Greed is usually a strong desire for money and success. It could be the need for a deal to happen right away. In trading terms, this is an unrealistic amount of profit.
When greed takes hold, all a trader can think about is how much money they’ve made so far. How much more they could make if they stuck with it. But there is a big problem with this way of thinking. A profit is made when a position is closed. Until then, the swing trader only has a POSSIBLE profit. Greed often makes people ignore the right way to handle risks.
FEAR Is a Dangerous Emotion in Forex Trading
The results of our survey show that traders and investors deal with “fear.” More than any of the other three emotions. In forex trading, fear is one of the worst and most dangerous emotions to feel. It is set off by a feeling that danger is close and is followed by a survival response. This is true whether the threat is real or thought to be real.
Without a doubt, fear is the strongest human emotion. When traders are scared, they will sell a position no matter what the price is. Panic makes people afraid, which makes them make bad decisions. Fear is the body’s way of protecting itself. Forex markets only move in one direction or the other. When the “collective” decides, not when a single trader thinks it should happen.
John Maynard Keynes, a famous economist and speculator, is said to have said, “The market may stay crazy longer than you can be solvent.” Oh, how true! There are many traders and investors who don’t agree with this.
As a momentum trader, the technical trend is always your friend in any market. Fighting against it will only lead to losses in the long run. On the other hand, fear might hurt a trader. If they have a string of losses and don’t enter a good setup.
Even if a trader has lost money in the past, he shouldn’t be afraid to make another deal. That’s why we have strategies for trading. Trading methods are made to take away the emotional part of trading. There’s no point in trading if you’re not willing to get in when the time is right.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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