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Trader’s Psychology: The Importance of Being Positive
A Good Attitude is One of the Marks of a Successful Trader
The psychological effect strongly influences trading results. All experienced traders are well aware of this nuance, however, in turn, beginners often undervalue the importance of this point. Actually, the psychological aspect of trading futures is key to earning profit. Whereas the situation here is more complicated, just simply the presence of a good attitude and self-confidence increases the likelihood that your plan will be successful. Trading psychology is a very interesting, important topic. There is a reason that there are so many bestsellers written as an answer to that very question.
This article will present a general summary of the main points on this topic. We will go through many aspects that touch on psychology and beyond. An honest outlook, emotional control, patience, suppressing the instinct to treat it like gambling, and the difference between live and demo accounts are all point that will be covered in this article. It is possible to go into the psychology of trading in more detail, as a number of famous authors can attest to, however, we decided to cover all of the main aspects in this article.
How a Trader’s Mind Works
This section of the article deviates slightly from the main topic. Here we will address the issue of how the brain works and how it differs from that of computer algorithms. How both intuition and your mood (mental outlook) relate to the productivity of your work will also be touched upon. As you know, this article is devoted to psychology, however, this section is vital to understanding the essence.
It’s not uncommon for people of a certain level of success to be superstitious. Not implying that they believe in all kinds of folklore or rituals, but in a pragmatic sense only. Referring to the fact that they follow specific principles, enabling them to achieve and maintain success. In the context of trading, this point is especially clear. The problem is that the market is to a certain extent unpredictable. Which is why a trader’s individual psychology is far from the least important on the hierarchy for success.
For what purpose are we doing this? And how do our brains work? These questions are very important because nothing is more important for trading successfully on the exchange than simple, algorithmic thought. Things would be different if robots had already surpassed people, but that isn’t going to happen, even taking into account improved “artificial intelligence” and neural networks that learn from their environments on their own. That answer to this question lies in the unique inner-workings of the human brain.
Traders (people) in particular are able to generate more precise forecasts in those very situations where robots are led astray. The entire problem hinges on the fact that there is no universal algorithm that can be counted on to forecast future price behavior accurately. The human brain, in contrast to computer programs, considers significantly more input signals (with at least a visual assessment of the chart) than robots. Computers are able to access a very limited amount of data, only that collected by the algorithm’s developer. The human brain accesses and processes a massive amount of information. Although, we aren’t aware of more than 80% of it. However, that doesn’t mean that all that information is absent from the thought process. That information specifically is what creates what is usually referred to as intuition.
With that in mind, we will not get too far off topic and return to trading. So, why do the brains of experienced traders forecast more precisely than those of beginners? Even if they both are using the exact same trading strategy. It’s simple. The point is that, in terms of practical trading experience, there are hundreds of thousands of different models of price behaviors in various situations already stored in their memories. Therefore, professionals think differently, they take into account not only the information before them at that time, but also what they have come across before, which is saved in their memory. Namely, in regards to the subconscious process. That is why specifically an experienced trader often can identify a false signal from the first glance, even when the indicators appear to show that it is the opportune moment to enter the market.
Why is it important to have a positive outlook?
In order to answer that question, we need to look a bit further into our first subject, looking into how our brains work. Every emotion and feeling prompts the development of a specific, let’s say, hormone that puts us in a specific state of mind. There are hormones for everything, fear, happiness, peace, certainty… and more importantly, for their combinations. Their concentration in our brains and veins not only affects our mood but also our objective productivity.
So, those who don’t expect failure, don’t experience it. And the reasons for that are fairly objective. When we are depressed, start to doubt ourselves and feel defeated, our brains literally begin to function worse. Meaning that the subconscious part of our thought process suffers when we are identifying signals, unbeknown to us, but in our memory. In contrast, if a trader is positive and has confidence in their success, then, first and foremost, that is reflected in their mental health and wellbeing; and secondly, actually increases their speed and mental productivity.
Our mental state has a real and lasting effect on our physical and mental health, but mainly on the efficiency of our mental process. In terms of psychical work, for example, this doesn’t play a key part. However, in the context of intellectual endeavors is absolutely is key. And trading falls into that category.
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8 Traits of Successful Traders
- Taking Trading Seriously. Professionals view trading on the exchange as a full-time job, not like a casino. In terms of trades, they are after quality, not quantity. The majority of beginners don’t take trading seriously enough. That, in the end, will lead to a loss in investment and disappointment regarding the lost opportunity for profit.
- This is a very beneficial character trait. Without it, it is near impossible to achieve anything of note (above average) in any field. Learning how to trade on the futures market is far from a quick and fast process, so, to make it through, a person needs to have a strong sense of motivation, or they would give up halfway through without understanding all the advantages and opportunities the field has to offer.
- Experienced traders never follow the crowd. This doesn’t mean that they never agree with the general consensus. On the contrary, they factor it in along with many other nuances. However, their final decision is based on thorough, cumulative analysis of the situation. Professionals operate, first and foremost, based on their personal experience. That knowledge is more valuable.
- Another very important character trait. Impatience inevitably leads to financial losses, as serious analysis becomes more and more like a lame game, buying or selling short-term rates (“white/black” in the algorithm). Successful traders must be able to wait for signals for good opportunities on the market or the right moment to close long-standing trades and so on.
- The Right Attitude to Personal Failures. The only one who doesn’t make mistakes is the one who doesn’t do anything at all. Successful people make mistakes as well. However, they differ in the way they react to their own personal shortcomings and failures. They learn from any situation. In the context of trading, it means that every unsuccessful trade or financial loss must be analyzed in-depth in order to discern what part of the trading system lead to the unfavorable result. After all, every trade is placed with the expectation that it will end in profit. However, it isn’t possible to predict everything. Every once in a while, your trading strategy will be improved, and, with time, your profit will increase.
- Risk Limitation. Trading on the exchange is a job that carries along with it a high level of financial risk. Therefore it is important that traders take this aspect seriously. They must always weigh the risk against the potential profit. Traders always hope that the potential profit outweighs the likelihood of the possible loss. In practice, of course, this isn’t always the case. However, sound risk diversification and capital management can keep financial losses to a minimum.
- During the trading process, traders are met with numerous temptations. When deliberating, traders fluctuate between objective logic, their intuition and their emotions (first and foremost they are fear and greed). Considering the statistics on the subject, it is clear that traders often don’t go with their heads. The vast majority of beginners go by intuition alone. They “Buy” when it “feels” right, not when their trading system has indicated it is lucrative to do so. Professionals operate differently, although they don’t put their intuition completely aside, they, however, begin with an in-depth analysis and evaluation of the situation.
- A Positive Attitude and Self-Confidence. We return to the topic that this article began on. Successful people to not spend too much time dwelling on their mistakes. They quickly recover from setbacks, analyze what went wrong, and then continue on in their chosen direction.
The Right Attitude to Anxiety
Fear, along with a lack of robustness and self-confidence, is the most destructive emotion and is a serious barrier to achieving your goals. Many beginners are familiar with the feeling when they literally begin “praying” that the market moves in their desired direction till their trade is closed, especially if they need several points for it. This approach is fundamentally wrong, it puts traders in an embarrassing and unsalvageable position in relation to the market.
There is no way to completely escape anxiety. And there is no need to try to, because it is our primary protection instinct, and it saves us from many reckless decisions. However, you need to relate to it in a healthy way. There is one universal way that enables you to decrease your level of “turmoil” in real measure. The key idea is that you need to answer the following question completely honestly. What specifically are you scared of? As it relates to trading, there is no need to guess, as everyone is afraid of their active trades leading to losses. Which is why you need to “look your fear in the eye”. When you enter the market, you should rigorously calculate both the anticipated profit and the possible loss, morally preparing yourself for the worst case scenario. This approach really combats anxiety, decreasing “turmoil”, allowing you to more soberly analyze the real situation. To put it simply, “hope for the best, but prepare for the worst”.
This article was a bit unusual, however, in it we covered the main issues regarding the psychology of traders. We went over a basic understanding of how our brains work, the effects of a positive outlook on intellectual productivity, character traits of successful traders, and also practical ways to overcome anxiety, the main saboteur of success. In closing, it is worth noting that, despite it all, trading remains a very risky activity. Therefore, never invest money that you can’t afford to lose without decreasing the quality of your life, such as with borrowed funds.
“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”
The Importance of Trading Psychology
Containing emotion and exercising discipline are key to making money
There are many skills required for traders to be successful in the financial markets—the ability to understand a company’s fundamentals and the ability to determine the direction of a stock’s trend are two of them. But neither of these technical skills are as important as a trader’s mindset: the ability to contain emotion, think quickly, and exercise discipline—what we might call trading psychology.
The psychological aspect of trading is extremely important. Traders often have to think fast and make quick decisions, darting in and out of stocks on short notice. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so they will stick with previously established trading plans and know when to book profits and losses. Emotions simply can’t get in the way.
- Market psychology refers to the prevailing sentiment of financial market participants at any one point in time.
- Investor sentiment can and frequently drives market performance in directions at odds with fundamentals.
- Understanding what motivates fear and greed can give you the discipline and objectivity needed to be a successful trader and take advantage of others’ emotions.
When traders get bad news about a certain stock or the general market, it’s not uncommon to get scared. They may overreact and feel compelled to liquidate their holdings and go to cash or to refrain from taking any risks. If they do that, they may avoid certain losses, but they also may miss out on gains.
Traders need to understand what fear is: a natural reaction to what they perceive as a threat—in this case, to their profit or money-making potential. Quantifying the fear might help, and traders should consider pondering what they are afraid of, and why they are afraid of it.
By pondering this issue ahead of time and knowing how they may instinctively react to or perceive certain things, a trader can hope to isolate and identify those feelings during a trading session, and then try to focus on moving past the emotional response. Of course, this is not easy and may take practice, but it’s necessary to the health of an investor’s portfolio.
There’s an old saying on Wall Street that “pigs get slaughtered.” This adage refers to greedy investors hanging on to winning positions too long, trying to get every last tick. Greed can be devastating to returns because a trader always runs the risk of getting whipsawed or blown out of a position.
Greed is not easy to overcome. It’s often based on an instinct to try to do better, to try to get just a little more. A trader should learn to recognize this instinct and develop a trading plan based upon rational business decisions, not emotional whims or potentially harmful instincts.
To get their heads in the right place before they feel the psychological crunch, traders need to create rules. They should lay out guidelines based on their risk-reward tolerance for when they will enter a trade and exit it—whether through a profit target or stop loss—to take emotion out of the equation. Additionally, a trader might decide that in the wake of certain developments, such as specific positive or negative earnings or macroeconomic news, he or she will buy or sell a security.
Traders would also be wise to consider setting limits on the amount they are willing to win or lose in a day. If the profit target is hit, they take the money and run, and if losing trades hit a predetermined limit, they fold up their tent and go home, preventing further losses and living to trade another day.
Doing Research and Review
Traders should learn as much as they can about their area of interest, educating themselves and, if possible, going to trading seminars and attending sell-side conferences. Also, it makes sense to plan out and devote as much time as possible to the research process. That means studying charts, speaking with management (if applicable), reading trade journals, or doing other background work (such as macroeconomic analysis or industry analysis) so as to be up to speed when the trading session starts. Knowledge can help a trader overcome fear, so it’s a handy tool.
In addition, it’s important traders remain flexible and consider experimenting with new instruments from time to time. For example, they may consider using options to mitigate risk, or setting stop losses at different places. One of the best ways a trader can learn is by experimenting (within reason). This experience may also help reduce emotional influences.
Finally, traders should periodically assess their performance. In addition to reviewing their returns and individual positions, traders should reflect on how they prepared for a trading session, how up to date they are on the markets, and how they’re progressing in terms of ongoing education, among other things. This periodic assessment can help a trader correct mistakes and change bad habits, which may help enhance their overall returns.
The Bottom Line
While it’s important for a trader to be able to read a balance sheet or a chart, there is a psychological component to trading that shouldn’t be overlooked. Being aware of how fear and greed can impact trading, exercising discipline, developing trading rules, experimenting, and periodically self-reviewing are crucial to a trader’s success.
Trading psychology refers to the mental and emotional states of a trader dealing in the financial markets. It is very instrumental since it determines whether an individual will experience success or losses. In trading, there is always a potential for losses. Studies even show that a majority (80%) of traders encounter losses regularly. Only a minority experience long-term profitability. This underscores the difficulty associated with trading. All in all, there is still a likelihood of success. This is where trading psychology comes into play.
Importance Of Trading Psychology
The knowledge of trader’s psychology predicates success. This is because a winning attitude can result in increased finances and cash, online or otherwise. Making money in the financial markets is dependent on the realization that belief in oneself is also important.
Although earning is a priority, a trader should not primarily dwell on the fact that they might make money or not. Instead, they should concentrate on instilling confidence and trust in themselves. This will bring them more success. This is one of the primary aspects and goals of trading psychology.
It is noteworthy that skills such as the ability to analyse the markets and determine the trajectory certain securities will take are important. However, their importance does not supersede a trader’s ability to contain their emotion and bias, have discipline, and think through possible choices quickly. A trader’s mindset is extremely vital.
Understanding and mastering trading psychology entails being cognizant of the snares associated with having negative psychological characteristics. Knowing what is not necessary will subsequently enable traders to develop positive traits. It has been documented that being familiar and knowledgeable about trading psychology helps a trader earn profits or minimize losses, in the worst-case scenario. This knowledge is what separates winners from losers.
In just a single day, the trader may be required to buy and sell a financial instrument in quick succession. They also need to stick to previously identified strategies despite the market moving in an unexpected direction and know when to place stop orders to curb losses. This necessitates a sober mind that is not easily swayed by emotions. The hectic and stressful nature of the marketplace makes these positive psychological characteristics important. Possessing these traits also separates winners from losers.
Pros Of Trading Psychology
- It helps traders contain their emotions. Emotional trading is disastrous. The psychology of trading posits that an individual’s psychological state determines whether the trader will experience success or losses. Greed and fear have the most significant impact on a trader’s performance in the market. They instigate certain decisions that may not be in accordance with proven trading strategies. Practicing trading psychology, therefore, helps a trader avoid these pitfalls. It permits them to make sound decisions that are not backed by emotions but by strategies.
- It enables traders to do away with their biases. A bias is a fixed personal preference that makes one choose one thing over another. It, in a way, informs the trader instinct. For instance, in forex trading, they may choose to sell a currency from which they have realized high profits previously and avoid one which they incurred just a single loss. Such forex trading psychology can block sound decision-making. Trading psychology helps one avoid biases.
- It is instrumental towards instilling discipline which is a key requirement for anyone hoping to make money online or by trading with brick-and-mortar brokers. For instance, it mandates a trader to follow a trading plan instead of making decisions on impulse or using emotions.
Cons Of Trading Psychology
- Trading psychology is different from one trader to another because the underlying emotions and biases are distinct. As such, there is no single template that everyone can use.
How To Master Trading Psychology
Trading psychology refers to a trader’s mindset or emotional wellbeing. It is crucial since it determines whether a trader will experience losses or success. As such, mastering it is crucial. Developing trading psychology requires an individual to understand their emotions, biases, and personal characteristics. They should then develop a trading plan that takes into account what they have identified. They should also exercise patience and not let their emotions come in the way of decision making whether they experience wins or losses.
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As with any form of speculative activity, the importance of psychology in forex trading simply cannot be overestimated. Humans are emotional beings, and they have well-defined psychological traits that often accumulate into a number of unique personality types. Furthermore, when traders group together en mass, their overall psychological behavior moves markets and creates the very chart patterns that excite technical analysts.
The fundamental psychological factors of a trader’s personality often come to the foreground when forex trading activities start to generate significant profits and losses, since many people experience strong feelings when making and losing money.
Forex trading psychology has been studied extensively by many researchers, typically to determine what type of trading mindset and personality type are most successful in terms of generating consistent trading profits.
Several of these researchers have written important books on the subject that traders can read to gain insights into their own activities and whether or not they are psychologically suitable to become a successful trader.
This discussion of the psychology of trading will start with an overview of the basic trader personality types as distinguished by Dr. Van K. Tharp.
Trading Psychology or Personality Types
In Dr. Van K. Tharp’s research on trading psychology, he separates traders into a set of fifteen personality types that can be assessed using his online Tharp Trader Test. These trader personality types each have a psychological profile that contains various weaknesses and strengths. His website contains greater detail on this subject for the interested reader.
The defining characteristics of these fifteen personality types are:
The Accurate Trader
These traders are noted for their tendency to use detailed analytical processes and keep meticulous and accurate records. Traders with this psychological profile often keep detailed notes of their decision making process in their trading journals, which tends to help them on future trades.
Due to their fastidious attention to analysis and recordkeeping, these traders can sometimes fall into the trap of paying more attention to these activities than to making profitable trades.
The Administrative Trader
This trader profile is characterized by the trader’s tendency to be practical, decisive and realistic in their approach to trading. The Administrative Trader has a tendency to be responsive to changing market environments that can result in profitable trades. In addition to adapting to different market conditions, this type of trader has strong decision making capabilities and can delegate authority when working with others.
The Artistic Trader
Artistic traders are characterized by their tendency to use their intuition and creative thinking in their trading more so than other traders. Due to their creative streak, Artistic traders tend to be more flexible and can adjust to changing market conditions. Nevertheless, this feature can be a double edged sword and cause problems for the trader if they become emotionally attached to losing trading positions.
The Adventurous Trader
This trader profile is noted for their open minded and flexible approach to trading and includes some of the most successful traders. Adventurous traders use their ability to respond effectively to market information and are generally accomplished analysts, prioritizing data and using it to make sound trading decisions. Adventurous traders often take significant risk and focus on factual information when making trading decisions.
The Detailed Trader
The Detailed Trader profile is characterized by a preliminary analytical process before taking a position in the market. Detailed Traders use logical assessment and careful analysis and often keep intricate notes on their trades and reasons for taking them.
Nevertheless, many traders with this psychological profile can fall into waiting too long to establish or liquidate trading positions, resulting in significantly lower returns.
The Facilitative Trader
This type of trader generally has a serious and sober approach to trading, preferring to trade in a social environment or interacting with other traders. Because of their focus on the social aspect of trading, these traders typically excel as part of a trading team or acting as someone’s trading partner. Facilitative Traders often observe the big picture of the market and trade in a decisive and well organized manner.
The Fun Loving Trader
This trader profile is characterized by a playful approach that includes a degree of social interaction when trading. Fun Loving Traders tend to have a positive outlook that reflects their optimistic viewpoint. However, due to their optimism and social interaction with other traders, their emotions could affect their objectivity when trading.
The Independent Trader
These traders tend to use their own interpretation of data and act independently of the crowd when trading. While their abilities to think outside the box can result in profitable trades, their lack of social skills makes them poor team players.
The Innovative Trader
This type of trader is noted for their creative and intuitive approach when analyzing information and establishing trades. Innovative traders tend to be able to process large amounts of information and react quickly in the market. In addition to their abilities in analyzing and reacting to market conditions, these traders tend to be good leaders and can excel in reading people
The Planning Trader
This trader type tends to be a competent leader and communicates well regarding trading matters. They tend to be well-organized and realistic, and they make trading decisions effectively. They tend to focus on facts to make reasonable decisions, and they can respond quickly and flexibly to new trading conditions by developing new systems.
The Socially Responsible Trader
Such traders tend to be loyal to social values they deem important and enjoy a social life. They seem most successful as traders when a trading opportunity presents itself that is consistent with their values.
The Spontaneous Trader
These traders typically think and react quickly when trading, although they tend to do so without having performed much analysis beforehand. They can find planning and following through difficult when it comes to their trading strategies.
The Strategic Trader
This trader group tends to make intelligent trading decisions based on factual information, and they aim to develop a suitable level of competence in their trading-related activities. They are typically seen as practical, realistic, well-organized and decisive when trading.
These traders also tend to have the ability to see the big picture when engaged in trading and they can think quickly when needing to respond to shifts in the market. They easily understand difficult concepts and learn actively.
The Supportive Trader
Such traders tend to be insightful, solemn and can be depended on for trading activities, although they lack some of the important characteristics of the best traders, so they typically either take on a support role within a trading team or offer financing to more successful traders.
The Values Driven Trader
This trader type tends to be independent and to focus on trading’s material rewards, ideas and relationships. They can also make decisions well and can see the bigger picture. If they can get beyond their emotions and value system, they can become successful as traders.
A Successful Trader’s Psychology in the Forex Market
In addition to having identified the above fifteen trader personality types, Dr. Tharp has also determined several key psychological characteristics of successful traders. His research on trading psychology led him to identify three key psychological traits shared by just about all of the best traders.
These include the following overall personality characteristics:
- Good traders have the ability to see and grasp the “big picture”. They can also make connections between events and recognize good trading opportunities as they arise.
- Such traders can ideally analyze markets logically in order to make sound trading decisions.
- They also tend to be decisive and well-organized, in addition to being able to perform operations sequentially.
Each trader’s individual success potential can be determined by assessing how many of these favorable characteristics they already have or are willing to work on developing. In particular, Dr. Tharp identified that Planning and Strategic Traders tend to show greater potential for initial trading success due to them having all of the aforementioned personality characteristics.
On the other end of the spectrum, Dr. Van Tharp indicates that the Supportive, Artistic and Fun Loving Traders tend not to have any of these characteristics. Rather than trading themselves, they can often do better by allowing other people to trade their accounts for them, unless they plan on performing considerable work on themselves to correct their sub-optimal trading mindsets and develop the personality traits necessary for success.
In between the above two groups are those trader personality types that have only two of the above characteristics. These include the Detailed, Facilitative, Innovative, Spontaneous, Independent, Administrative, Values Driven, Socially Responsible, Accurate and Adventurous Traders.
Five Important Trading Psychology Books
In order to learn about the optimal trading psychology and mindset, many novice forex traders choose to read some of the seminal literature on the subject. The following books comprise a short list of five such books that many experienced traders would recommend to a beginner interested in the subject of trading psychology.
- Reminiscences of a Stock Operator by Edwin Lefèvre
This very popular book tells the fascinating story of Jesse Livermore’s equity trading career that spanned the early part of the 20 th century. Still very relevant to traders in the modern era, this book perfectly illustrates the fact that the mass psychology that drives markets — and the individual psychology that traders face each day — really do not change much. Many traders were given a copy of this book to read when they first started out in training programs at professional trading firms and I highly recommend it to others interested in the topic.
- Trading In The Zone by Mark Douglas
In this book, Mark Douglas encourages traders to take on a probabilistic approach to trading and to form a powerful “winner’s mindset” as the keys to obtaining the best results while trading. He provides his readers with concrete steps and ideas for changing a trader’s fear of losing money into achieving ultimate success as a trader. Although Mark had no formal psychological training, he wrote this book on trading psychology from his own personal experience operating in the markets. This is arguably the best book ever written on Trading Psychology, certainly one that has had a profound effect on me.
- Super Trader: Make Consistent Profits in Good and Bad Markets by Dr. Van K. Tharp
As the previous sections of this article show, Dr. Tharp has an extensive theoretical and practical understanding of what sort of personality traits make traders successful. This book expands on his insightful personality testing results to offer an overall approach for how people drawn to trading as a full-time profession can become successful financial markets traders.
- Market Wizards: Interviews with Top Traders by Jack Schwager
This well-known and classic book provides the reader with a fascinating series of interviews by some of the world’s top traders. Each of these experts provide valuable insights, trading tips and information that most traders will find illuminating. The book also contains some excellent quotes from great traders throughout history, many of whom managed to move beyond their losses and ultimately generate great wealth from trading the markets.
- Trading in the Zone: Maximizing Performance with Focus and Discipline by Ari Kiev
In this book, Dr. Kiev describes a set of proven ways to get into and then remain in the “Zone”, which describes an optimal trading state for success. Dr. Kiev offers various beneficial psychological tools that traders can use to benefit and enhance their trading skills no matter what sort of trading style they prefer to employ. This book seems especially useful for those who feel they need help reviewing, managing and optimizing their emotional responses when trading. It also contains an interesting set of trader case studies that explain how they deal with their emotions while trading and which provide useful insights into how to go about developing an optimal trading psychology and mindset.
Speculation Psychology and The Optimal Trading Mindset
The psychology and emotional discipline of the successful market speculator has been the subject of many interesting books, such as those listed above.
Although not all experts agree, the research that has been done on this topic tends to point to a number of beneficial psychological factors and behaviors that people need to engage in to stand the best chance of success as a trader.
These can be summarized as follows:
- Avoid trying to beat the market. Instead try to be sensitive to its direction and align yourself with it.
- Learn to put fear and greed in the right place. Feel fear when you are losing money so that you cut losses short and greed when you are making money so that you let profits run.
- Avoid getting over confident and taking excessive trading risks.
- Avoid letting losses destroy your confidence and ruin your day, and start to see taking losses as a simple cost of doing business as a forex trader.
- Keep a positive mindset.
- Focus on maintaining trading discipline and good money management practices. Stick to your trading plan no matter what the market does. Refine your plan if necessary, but only do so once your trading positions are closed to avoid having them influence your plan.
The basic idea here is to look at your forex market speculation activities as a business. Certainly, you will win on some trades, and you will lose on some trades, so see that as part of the process of trading. Overall, you should always seek to manage your business and your trading funds so that you will be able to remain in the game long term.
Mass Psychology and Its Measures
Many traders use measures of mass market psychology to influence their trading decisions as part of their trade plan. Most chart patterns used by technical analysts are considered reflections of some aspect of mass psychology that tends to repeat itself.
Some technical traders also use Elliott Wave Theory, which takes into account the psychology of the market as its trending movements typically unfold in five successive waves, followed by a counter-trend correction that usually unfolds in three waves.
Another popular measure of mass psychology in the financial market is the Commitment of Traders or COT report that is published each Friday for the preceding Tuesday’s contracts by the U.S. Commodities Futures Trading Commission or CFTC.
The results of this weekly report inform traders regarding the net amount of outstanding positions in each contract where twenty or more traders hold positions near the CFTC’s reporting limits, and which are broken down by several category of trader, including Commercial and Non-Commercial traders.
Commercial traders are those who are generally hedging their exposures that arise in the course of doing business. In contrast, Non-Commercial traders are typically speculating in the futures market. They consist of financial institutions, individual traders and hedge funds.
As an example of the data made available on the weekly COT report, the graph shown in Figure 1 depicts the net weekly results of this report for each of the major currencies traded on the Chicago IMM futures exchange for Non-Commercial traders.
Figure 1: A bar graph of net weekly outstanding futures contracts traded on the Chicago IMM futures exchange for each of the major currencies that are held by Non-Commercial traders.
Many traders use the COT report to learn about the direction and magnitude of currency futures positioning in the markets they are interested in. This can be used as a measure of market sentiment to provide analysts with information about how sizeable futures traders are positioning themselves.
An item of special focus for traders is how the current positions listed differ from those listed the previous week. Determining these weekly changes gives traders a guide to how market sentiment is developing in the futures and option markets they wish to follow.
As an example, when many Non-Commercial traders are positioned in a particular way, this can signal a market reversal may soon be forthcoming as these extreme positions start to unwind. Also, when the COT positions change from positive to negative that tends to be a signal to short the market, while a switch from negative to positive might signal taking a long position in that market.
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