Trading with real-money has a way of bringing out fears and anxieties in most Forex Traders that simply didn’t exist when they were playing for fake money in their demo accounts. The reason is because something real is suddenly on the line, and it represents college tuition fees, a new car, a lifesaving operation for a relative or something else that is very tangible.
Trading Psychology is one of those areas that novice traders somewhat pay lip service to because they naturally assume that “they are made of the right stuff”, and that cracking under pressure, or not being able to make a decision to buy or sell when the markets are moving fast is not something that would afflict them.
And it is only when they have been placed squarely in the crucible of the markets and have had to make meaningful decisions that genuinely affect their lives that they start to gain new found respect for the mental strength needed to trade.
The real-world ways that a trader’s psychology can determine his success or failure when trading are numerous, but basically come down to two primary human emotions:
When your financial future is being played out live on a price line chart in front of your eyes, then it can do funny things to a trader’s mind. In the same way that a parachutist who is approaching the ground can experience “ground-rush” where the ground appears to be racing up at them, even faster than it actually is. A Forex trader can suddenly see significance in small whipsaw price movements that mean he closes out a trade too soon and misses out on extra profits he could have made or he holds on too long and ends up making dramatically larger losses on trades that should have long since been closed-out.
Both of these are related to the emotion of fear, and is one of the primary reasons why trading with rigid rules and systems is such a good idea because it can help to eliminate spur of the moment fear decisions.
The flip side of fear is greed and wanting to profit too quickly. Trading is by its nature a gladiatorial affair, and it tends to attract individualistic people who rate their own judgment very highly.
Normally that is fine, but when confidence turns into arrogance, then it can very quickly become greed and a certain sense of invincibility can develop, especially if the trader has had a run of good decisions that have made him money.
This can be fatal, because it can lead traders to exceed their own trading limits because they consider a particular trade “a certainty”, and become greedy to make money far more rapidly.
Oftentimes the result of this can be losing the entire trading equity when a trade goes bad, or the whole market moves unexpectedly.
Guarding against both Fear and Greed and evening out your trading psychology and instincts can certainly help to improve your success and minimize your failures with Forex Trading.