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An Overview of Trading Psychology

An Overview of Trading Psychology

In the world of trading and within each known market, such as Forex or the stock market, you will find that there are several things that each trader must consider and must study in order to become an expert.

This type of knowledge needed ranges from the definition of the market to work itself, operation of the different platforms used competition, economy, and adequate amount of capital to invest and, above all, what type of market will you choose to start.

But there it is a very important aspect that most traders often ignore because they take it for granted; the trading psychology.

It is necessary to understand that the success of any type of business or investment will always depend on us and of course on the way in which we handle a situation or execute each of our thoughts, therefore, psychology is fundamental in the commercial world, in all markets.

The trading psychology is undoubtedly the most important discipline that must be handled and studied by any aspirant to trader in any market, such as Forex trading. In the world of Forex psychology is necessary; this type of investment is attractive for many people around the world due to its ease and comfortable platforms to use. However, the use of psychology becomes a main step to manage if you want to be a very successful trader.

Now, a good advice to start the issue is that: self-confidence and emotional control are the fundamental pillars that are responsible for operating the psychology of trading and of course, manage your emotions, leading to success.

Table of Contents

To begin shaping the aspects that make up the trading psychology, let’s talk about certain elements that we will call enemies of the mind. The enemies of the mind are nothing more than different emotions that give a negative result or effect on the trader’s mind. These are enemies that you must know well for you to have the tools to face and defeat them.

Fear

 

The first enemy is fear. We define this as an unpleasant sensation accompanied and loaded with anxiety or apprehension that is weighed in the person due to the presence or anticipation of the danger. When there is a trader operating, this feeling comes often; it is one of the most common enemies of the mind that the trader will face. This always happens when you are an inexperienced trader and you are starting. Despite being a normal feeling, many times it can get out of control and nobly affect any strategy the trader has.

Fear can also appear in experienced traders, especially when they get a couple of losing operations, which lead them to feel overwhelmed by fear. The important question is how to deal with it? This can be accurately answered; basically, the best way to deal with fear is to move away from situations where you risk more money than you have available, since with caution, fear disappears.

Euphoria

Although normally this feeling is characteristic for being a good thing, since it gives the trader a lot of confidence and security in themselves and their strategy, it can also be very dangerous, simply because it can get out of hand and in that case we would find a trader who is overconfident and can make decisions that will bring them regrets in the immediate future. This enemy usually makes presence after the trader gains a great amount of profits or nails their entry. Statistically, the greatest commercial losses occur after a couple of quite lucrative victories, so a great trader must not only hit these abnormal profits from time-to-time, they must control their mentality so that they can safely exit with these profits and not damage their account in the long-run.

Now, to be able to solve this, a good measure is to concentrate on what you are doing, always remembering that everything in the market will always be about probabilities and of course the sensible decisions made by you. Like the previous advice, the best thing you can do is not to risk more money than you have to spend. There have been circumstances where after traders largest winning streaks, they have been given larger budgets, and blown everything. New biological discoveries into the “risky highs” of trading from John Coates, a trader turned neuroscientist, argue that due to the euphoria and the chase of new highs and abnormal profits, traders are at higher risk of losing their profits due to the increase in testosterone, and so giving larger budgets is counter-intuitive in reality. Instead, firms should give their traders a cooldown period of three weeks so that their body can normalise until their “biology resets”. 
Source, Reuters. Scientist, John Coates.

Panic

Of all the feelings, panic is one of the most curious enemies, is defined as a sudden feeling that comes loaded with fear in excessive amounts, is usually sudden and overwhelming, in addition to uncontrollable thoughts or action. Due to its characterization it can feel a bit like fear, however it is much worse, since it is paralyzing and much more irrational.

The trader must always be alert and active, not only to monitor their business, but to prevent violation of him/herself from going against their rules, or trading without caution. This is considered an enemy that approaches silently in different situations, in novice traders and professionals alike, amid situations where there is a lot of pressure, or when they witness stories of how other people are having or had significant losses in the market. Another event in which it can occur is in periods of market volatility.

Of all the hindering feelings, this is the worst, because a panicked trader will make many mistakes and it will find themselves unable to perform a logical analysis of the situation in which he finds himself. There really is no specific way or infallible advice to avoid the appearance of this feeling, usually the possibility that this type of situation occurs decreases as the trader gets experience. But something important is not to believe everything that is heard or read about other people’s experiences and remember that everything is about probabilities. Many traders now believe that the main cause of profit and loss is your mentality and psychology as a trader, not just the analysis.

Here are some quick tips from us to stay on top of the negatives caused from psychology:

·    Try hard to find the right trading strategy for you and stick to it. You will be able to accomplish this by studying other trading strategies before and after you choose it 

·       Manage your risk, always remember that.

·       Know yourself, through the study of your emotions and been aware of your reaction to different situations.

·    Stay organized. Taking care of this point can be a bit difficult, but it is essential, a good idea can be to have an operations diary where you can track your progress and thus study the correct and incorrect movements made by you, this being a measure preventive So you can have a kind of guide on what to do and what not to do in the near future.

·   It is never too early or late to walk away. Many traders leave the screen once they earn or lose a certain amount of points a day, why not give this a try? Consistency has been linked to a more healthy mind.

Summary

The best way to deal with any situation that triggers emotional problems and unwanted feelings is having a logical method at hand to trade with a minimum margin of error. And the best way to harvest it is by studying the market in which you have decided to operate more thoroughly.

This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.

Posted by Alex in Lessons

Scalping for Beginners

Scalping for Beginners

One of the challenges new Forex traders face is deciding which of the various trading styles — scalping, day trading, swing trading, or position trading — to follow. While each of these styles can be profitable when followed properly, as a beginner trader, you need to be sure that scalping is the right trading style for you.

In this article, we will discuss the basic things a beginner should know about Forex scalping, including what scalping is, the personality for it, the charting time-frames, and the various scalping strategies for a beginner.

Table of Contents

Forex scalping is a style of trading style that tries to profit from minor price movements mostly on the lower time-framed charts. It is a fast-paced style of trading and the quickest way to earn some profits from a trade, no matter how small. With this style, a trader opens and closes his trade once it has earned a little profit or loss (5 to 10 pips) and move on in search of other trade setups, with the hope that the little profits will accumulate over time.

A trader who uses this style of trading is called a scalper. Depending on the time-frame a scalper uses, a trade may last from a few seconds to some minutes. Most times, scalpers don’t hold their positions beyond a few minutes — whether profitable or not — as they are always analyzing the market for any sign of weakness.

One thing which traders try to avoid in Forex scalping is taking a large loss from a trade. Some scalpers use profit targets and stop losses to ensure fast exit from the market. Others employ strict manual exit strategies. The manual exit strategies help traders execute entries and closes more swiftly, but it can add risk. If you are leaving open stop losses, and a trade goes quickly the wrong direction, you could take a much bigger loss than intended.

 

Scalping is a very tedious and mind-wrenching task — watching the market all the time, analyzing every bit of price data whilst entering and exiting trades swiftly. That is why many legendary scalpers are looking into algorithmic trading. They try to automate their Forex scalping system by creating trading robots. Over half of the trading on the stock market is now reported as automated, and only 10% are from retail clients!

Forex scalping is not for everyone — not all traders can bare the risks involved or have the temperament to effectively implement the strict rules needed in scalping. So, if you must scalp the market, be sure that you have the personality for it.

A scalper must have the ability to concentrate on the market for a long time, so should be someone who enjoys sitting in front of the screen analyzing the minute-by-minute market data. The slightest bit of distraction can cause a huge loss.

The ability to monitor markets for prolonged periods of time is not the only scalping requirement. To effectively scalp the Forex market, the trader must be able to react quickly to changing conditions in the market. He must be able to pull the trigger without hesitation when he needs to do so.

 

In other words, a delay is very dangerous when scalping. For instance, if you fail to quickly take your profit, the market may turn against you and wipe out the profit in a split second. You may even end up taking a loss. Similarly, hesitating to close a losing trade may lead to a larger loss which could eliminate the many small gains you have had. We have noted the necessary traits of a good trader. Please click here to read more on the psychology of trading.

When scalping, you are trying to capture the slightest price swings in the currency pair. So, it makes sense to analyze the market on the lowest possible time-frame.

Many Forex scalpers trade on the 1-minute chart or the tick chart, but some may trade on the traditional 5-minute chart. However, it may be best to employ the multi-time-frame approach — using multiple time-frames and the tick chart.

 

With this approach, you may analyze the market on the 15-minute and 5-minute charts and step down to the 1-minute chart or the tick chart for a better entry level. After entering a trade, you monitor it on the 1-minute or tick chart.

There are many ways to scalp the market. For most traders, scalping involves using technical analysis signals derived from price actions and indicators. However, some scalpers like to trade the high-velocity moves that happen when important economic data is released.

 

These are the common Forex scalping strategies for beginners:

This strategy is based on the fact that price moves in waves and tends to revert to its mean value after moving significantly away from it. Scalpers who use the mean-reversion strategy don’t care about the direction of the trend. One popular indicator for this strategy is the Bollinger band — either used alone or in combination with an oscillator like the stochastic.

A screenshot of scalping with Stochastics.

You can trade this strategy using a moving average indicator or a simple trendline to indicate the trend. Then, use a momentum indicator, such as stochastic, RSI, OsMA, Williams R%, CCI, or MACD, to estimate when a pullback is over.

Another simple scalping strategy is to trade price bounces at a strong support or resistance level. What you need is to identify the resistance or support level and wait for the price to get there. If the price gets there and reverses, you may place a trade in the direction of the reversal.

 

Before using this strategy, make sure that the market volatility is low to reduce the risk of sharp breakouts. Also, you need to learn reversal candlestick patterns and look out for them when a bounce happens.

Some scalpers love the high volatility that comes with the release of economic data. Examples of this include the non-farm payroll (NFP) and the CPI, or a speech from a central bank governor. Certain political news can cause huge price movement too.

 

It is important to know that scalping a highly volatile market is a double-edged sword; can make huge profits if you’re right, but you can lose more than planned if you’re wrong.

Conclusion

Forex scalping is a fast-paced trading style in which a trader aims to take numerous small profits. It may be a fast way to make money in the Forex market for a beginner, but it can also be the fastest way to ruin a trading account. Be sure you are up to the task before choosing this style.

This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.

Posted by Alex in Lessons