It might. You tell me (after reading this article).
Have you had a chance to think about risk? I mean, really think about what it is for traders? How can we use it on our favor, is it possible to eliminate risk?
If you haven’t, please do so … because once you understand what it really is (and accept it), you’ll trade with ease, you’ll trade with more confidence, you’ll be more disciplined and patient… and at the end, you’ll trade with better results.
I can guarantee it…
And you know something, in some cases, you might have already experienced what it is to accept and embrace risk (even unconsciously).
Oh men, when this happens, almost every trade goes on your favor, you get out of the market just when it starts to go against you, you take profits just at the right time, you trade the right trade-size, etc, etc, etc.
risk in forex, trading psychology
“Trading is a mind game”
Do you agree with the statement above?
It’s not about the methodology you use, it’s not about the way you analyze the market, it’s not about the indicators you use, not about Fibonacci or Elliot waves, not about fundamentals. Nope.
It’s all about confidence.
This is the reason two traders, using the same system, same trading plan, same everything, will have different results most of the time.
Because traders have different levels of confidence on themselves and the system.
One trader will get out of the trade sooner, then he will not take another trade, the other will risk more in the same trade, etc. There are practically thousands of different scenarios. And each trader will act based on their level of confidence. More on this later.
confidence, trading psychology
What is the first idea that pops up in your mind when you lose a trade? “There must be something wrong with my system”, or “I knew it, “I shouldn’t have taken this trade” (even when your system signaled it).
But sometimes I think that we need to dig a little deeper in order to see the nature of our mistake, and then work on it accordingly.
What Mistakes really are
Most of us relate a trading mistake to the outcome (in terms of money) of any given trade. The truth is, mistakes have nothing to do with it, we make a mistake when we don’t follow our system, when the rules you trade by are violated.
To have a better understanding of this, take in consideration the following two scenarios:
forex mistakes, trading psychology
Yesterday I was talking to an old trading pal about the impact of the Aussie unemployment report (real good numbers by the way, jobs gained were +35.2K and the market expected 10.2K and the unemployment rate was 5.5% against 5.8%). Anyway, he traded that report, just a few seconds before the announcement he went long and held the position for a few hours making a quick pip there.
Of course it is always good to get pips here and there, but what I always keep in my mind is the alternative history (in the economic arena this is similar to the opportunity cost). In this case, what if the market went down instead? (You know sometimes the market moves against the fundamentals), even if you use SL orders, the market could gap then your loss will be unbearable to take, you would wait and see if the market recovered but it continues to move against you. The worst scenario here would be to blow up your trading account just for a quick pip: this is the results of your alternative history, are you willing to take this type of risks?
Lets put it this way, if you keep trading the unemployment announcement say for 2 or 3 years, the “unexpected event” (of the market moving against you after that announcement) will arise sometime during that period and the result will be devastating. I ask you again, are you do you have a shield for the “unexpected event”?
Please feel free to comment.
Fundamental, randomness, trading psychology
Fear and greed are the emotions that have the most impact on traders and investors, they make us make irrational trading decisions, Can we get rid of them?
I don’t think so, they are part of the human nature. Think about this: why dot you jump into a lion’s cage? Because you are afraid of what could happen to you, right? So, this fear is keeping you alive, the fact that you are afraid is actually helping you. And know the question is, can we apply this in the trading environment? Can we make our fear to work on our favor? Of course we can.
Let’s put it into the trading perspective: when you developed your system, you defined what seemed to you a low risk trading opportunity (i.e. when the stochastic figure when from overbought to the neutral territory, or you got a candlestick pattern in the direction of the market condition, etc). What happens when you get in to a trade when there is no signal? You don’t have a low risk trading opportunity, aren’t you afraid of losing? We all should.
Now, I know most of the time it’s difficult to get rid of these emotions, even the most experience traders experiment them. The difference between experience and novice traders is that, the first ones don’t make trading decisions when there are in a trade, all trading decisions such as: when to close the trade, when to take partial profits, when to add to the position, were made way before they entered the into market, because they know that in the moment they entered the trade, emotions will kick in and will make them have an “irrational” bias, that most of the time makes them make wrong trading decisions.
So my advice here would be to have a well defined trading plan for everything:
- Under what circumstances you are going to close the trade
- When to add to the position or when to take partial profits
- Trading size, where to set SL and TP orders
- Etc etc etc
This way you won’t have to make them when you are not likely to think objectively.
fear and greed, trading emotions, trading psychology