Welcome to the Psychology of Trading course!
In this course, you’ll learn all about the decision making process of trading: simply, quickly and interactively.
Specifically, we will discuss some of the common psychological obstacles to trading and provide some solutions to them.
Remember that you’re free to watch each individual lesson as often as you’d like.
So now, if you’re ready, let’s get started ….
Fear of loss
Fear is what often gets in the way of successful trading. That’s why understanding and controlling your fears is so important.
So, how do you stop your fears from controlling your trading? The answer lies in developing a trading plan.
As the old adage goes “Failing to plan is planning to fail”, your plan is what will help you in navigating the Forex waters with profit.
As such, your plan should clearly set your trading goals and identify the price levels and strategies you’ll focus on.
If you don’t yet feel like you know enough to plan in this way, then you might want to focus on practice trading for some time or seek out more traders’ education before starting to trade on a real account.
How to overcome fear of loss
Success as a trader requires overcoming your fears and developing confidence to learn from your mistakes.
To realize long term success, you’ll need to believe in your ability to make more money than you lose. Further, you should always stick to your trading plan regardless of the conditions of the market.
That makes it easier for you to continue to place trades, even after a string of losing positions. Learning from your mistakes is crucial to becoming a successful trader.
Most traders know what it feels like to hold on to a trade for too long, and see significant profits go down the drain due to this. When this happens, it’s often the trader’s greed that’s to blame.
Greed changes the way you think and act, and can cause you to make mistakes in the market, which can cost you dearly.
A lot of new traders imagine that it’s possible to earn returns of 100 or 1000 times their initial investments from just a few days of trading. Add a high leverage rate into the mix and you have a sure fire recipe for disaster – courtesy of greed.
It is important to note that success in Forex trading requires determination, hard work, and discipline.
However, greedy traders always think that this business is not based on any rules and they end up placing trades without proper analysis. The result? Massive devastations on their trading accounts.
How to overcome greed when trading Forex
Your decision to invest in the markets should be based on rational analysis.
Since trading is not gambling, you should never treat it like it.
Remember that there are a lot of opportunities in the markets, but you’ll only be able to exploit them if you can learn to control emotions like greed.
After all, when you think you’ve spotted an opportunity, shouldn’t you go all in? Actually, the answer is NO.
Don’t risk your account in a single trade – it’s the classic mistake of an inexperienced trader and it means letting your greed control you.
Always remember that the market can go against you.
Dance to the tune of the market, do not dance at your own tunes
In Forex trading, position management involves controlling how you invest and the amount of money you allocate for entering each trade in the market.
As a trader, your position management strategy is crucial for successful trading. It’s of essence to note that you may not be able to control the markets, but you can control how you invest and the amount of risk which you take.
Your money management strategy should answer these two key questions:
How much money should I risk on any single trade?
What size of trades should I be making?
Position management solutions
As a trader, your first goal should be to preserve your capital. If you can stay in the market long enough to achieve some big wins, then it should cover the costs of your losing trades and deliver you some good returns on your investment.
And, you can only achieve this through having a good money management strategy.
Most experienced traders never risk more than 2% of their trading capital on any single trade. Thus, with a $10,000 account, that means your maximum potential loss should be $200 dollars on any single trade.
It’s no secret that you can’t control the direction of the market, or the extent of its swings and movements. But there is one way in which every trader can achieve real control over their trading – and that’s through proper money management.
Money management is a set of rules and guidelines designed to help you keep risk at a level where you’re comfortable.
Effective money management asks, then answers these three key questions:
What should my risk-reward ratio be?
What is the right amount of risk for me to accept per trade?
And how much risk should I take across my account?
These questions sound simple, but getting them right is the key to your success as a trader. With the right money management strategy in place, you can be wrong 50% of the time when you trade and still profit overall.
Risk management solutions
The risk-reward ratio helps traders determine the level of risk in a trade. It shows how much a trader is risking versus the potential reward they can make if the trade becomes a success.
So, how do you calculate the risk-reward ratio?
The “Stop Loss” displays your risk, and the “Take Profit” displays your potential reward.
So, if on a specific trade your stop loss is set at $100 and your take profit is set at $200, then the risk-reward ratio is 100:200 or 1:2.
The larger your risk-reward ratio, the more easily you’ll be able to absorb losses through time. An acceptable risk-reward ratio for beginning traders is 1:3. Any number below 1:2 is too risky and the trade should be avoided.