When it comes to investing, there is a treasure trove of psychological information available. In fact, there are volumes of research done on trading psychology alone. But Forex trading is an entirely different ballgame. Are those same psychological traits prevalent in the land of Foreign Exchange currency?
That is what we are here to figure out today. Because successful Forex trading requires a much different psychological mindset than that of stocks and other traditional investors, undoubtedly, the mistakes they make are psychologically different, too, right? Well, let us find out!
4 Psychological Mistakes of Forex Traders
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We did some research to find out if Forex trading was the same as gambling. Our Forex vs. Gambling results might shock you (or, they might be precisely what you are expecting)!
- Unrealistic Forex Trading Expectations
Sometimes Forex traders seem to forget the fact that probabilities exist for a reason. It is not probable for a Forex trader to be profitable 100% of the time, but some of you guys seem to forget this fact. You need to know that sometimes losses are not only possible but inevitable in the world of Forex (or just about any area of investing).
Learn when to cut your losses and move on so that you can make it up on the next trade. Do not try to mess around with your stop/loss presets on your currencies in hopes of trying to eke out some tiny bit of profit. That is an excellent way to just dig yourself in deeper.
- Forex Traders Are Overconfident
Sometimes confidence is excellent when it comes to investing. In fact, confidence is actually a required trait for those that need a mental push to take a significant risk in order to realize potentially big returns. But in Foreign Exchange, being overconfident can cause nightmarish scenarios.
The second your mindset goes to “Forex trading is easy!” then you should either take a break or just call it quits because it is only downhill from there. You need to have laser-sharp precision and mental focus for its trading. Overconfidence is a great way to tear away at that focus and start letting your guard down.
- Emotional Forex Trading
One of the most common psychological mistakes of Forex traders is that they let their emotions get in the way. This is not limited to Forex trading only. In fact, emotional trading is linked to huge losses across any traditional or alternative asset classes.
There are two schools of thought that cause emotions to ruin Forex gains (and gains from any other investment):
Greed – You see, other people are making a bunch of money with a specific currency pair, so you get greedy and want to jump in on those gains as well. Except, by the time you dive in, the money train has already stopped. You are now needing to get rid of your currency pair and end up having to sell at a loss.
Fear – It is human nature for our minds to assume the worst. Maybe your ideal currency pairs are not performing well, so you hurry up and pull the trade before any gains are realized. Except, once the trade has been removed or canceled, the market makes a little jump that would have given you some sweet profits. Fear caused you to miss out on those profits.
- Poor Forex Traders Cannot Admit Defeat
The final mistake we are going to leave with you here today is this: Psychologically, a poorly performing Forex trader has trouble admitting defeat. This may go hand in hand with our first point about probabilities, but it needs to say it on its own.
Your currency pairs are on a losing run, and you need to pull the plug. Your experience tells you it is time to pull the plug. But, for some reason, your brain is telling you, “No, hang in there a little bit longer, it’s going to bounce back, I promise!” Some Forex traders even double down on losing trades. “I’m losing now, but if I throw more money into the trade, then when it rebounds, I’ll have made a decent profit!”
Just learn to listen to your gut and listen to your experience when you are told that it is time to jump ship on a particular trade!