Entering the forex market with the right mindset is highly crucial for long-term success. Here are some basics in trading psychology for beginners that you can learn.
Do you want to try forex trading because it's an easy money machine? If so, you better erase that thought from your head because that is simply not true. Quite the opposite, forex trading is a risky business and it takes a lot of effort to control the risks.
If you're planning to trade independently, you need to have sufficient knowledge about trading mechanisms and forex analysis. Once you get the hang of it, then you could think about starting your trading journey. However, it is also worth pointing out that to be a successful trader, you need to have a good mindset. This is called the psychology of trading and today, we're going to learn how to master it.
Be Aware of Potential Losses
Before you start trading, you must understand that loss is a common thing. In fact, all forex traders must have experienced losses, so losing isn't something that you can completely avoid no matter how confident you are with your skills.
If you only listen to brokers' marketing, then you might think that trading is an easy job. I mean, who wouldn't get excited if there's a prospect of making money just by staring at the screen the whole day? And we're talking about a million bucks worth of profit or more, not just pocket money.
Unfortunately, those promos always forgot to mention that before you can get such enormous profit, you must lose some money first. According to many pieces of research including the one conducted by the AMF, about 90% of traders must have experienced losses and lost their initial capital. Alternatively, you can do your own mini-research and just ask any trader about this. You'll find that no matter how successful they are as a trader, they must have lost some money in the process.
Some traders even argue that in order to win in trading, one needs to know how it feels to lose. This is why if you want to be a good trader, you shouldn't be afraid of losing. People who are scared to lose tend to have a hard time adjusting to the forex trading pace, which can be unpredictable at times.
You Need a Good Amount of Starting Capital
Theoretically, anyone with an internet connection can trade forex. In reality, forex trading is not for everyone. Here's a list of types of people who should probably avoid the forex market:
- Those who are unemployed.
- Those with low income.
- Those who are currently in debt.
- Those who are struggling to pay their monthly bills.
The biggest reason why those people are not encouraged to trade is that they are still considered undercapitalized. To start trading, you should at least prepare $500 in a mini or micro account. Even that doesn't guarantee profit straight away. As a trader, it is crucial to remember that forex trading is not a cheap investment and you should only trade with money that you can afford to lose.
Forex Trading Needs Practice
Money is important in forex trading, but it isn't the only factor that will contribute to your success. Just because you can afford to invest a lot of money in your trades, doesn't mean you'll get bigger profits. Remember that only 10% of traders end up getting big profits, so it's certainly not easy to be a part of that group.
The key to becoming successful is to never stop learning and keep practicing. There is a misconception that forex trading can make someone a millionaire overnight. To be fair, it is possible to get huge returns in forex trading. However, huge returns will always go hand in hand with huge risks.
Forex trading is simply not the place to search for instant money. This is what most beginner traders don't understand. In order to make a profit, you need to have a high level of discipline, similar to Miss Universe candidates who need to learn many things to polish their looks, knowledge, and attitude, traders need to work hard too.
In reality, traders typically get a huge loss because of the following things:
- Trading without A strategy
Getting high profits is every trader's dream, but that's not the same as having a trading strategy. A trading strategy must contain not only goals but also executable actions to achieve the goals.
- Not enough practice in the demo account
Demo account is an important part of a trader's life. As mentioned before, in order to be a successful trader, you need to do a lot of practice. Demo account is an excellent place to practice because it allows you to "trade" and use all the features without having to invest real money. Just practice for a couple of months until you gain confidence then start trading in a live account.
- Not maintaining trading discipline
Discipline is crucial especially when it comes to executing trading strategy and managing capital. Without trading discipline, you will get a hard time making profits.
- Poor money management
Like any other form of investment, forex trading also requires good money management. If you can manage your money well, then you will be able to control the risk of trading as well. You can check whether your money management system is good or not by using the demo account.
Control Your Emotions in the Long-term
Getting into the world of trading means you commit to staying on the boat for the long term. If you want to get huge profits, you need to be patient and put in a lot of effort. Most successful traders have gone through a long journey full of ups and downs before they can get to where they are at today. Even experienced traders can still lose money sometimes, but generally, they are able to maintain consistent profits. Instead of aiming to get zero loss, which is pretty much impossible, it's better to think that you simply need to generate more profit than loss.
See Also: Risk Reward Ratio In Forex Trading
If you just started your career in trading, just take it easy. Forex trading isn't something that you can master in a day. Here's what you can do to keep your trading psychology in check:
- Trade only when you can afford the loss
Forex trading is a rather risky investment (high risk, high return), so only use spare money that you can afford to lose. Do not take from your day-to-day budget or even worse, take a loan to fund your trades.
- Don't put all your eggs in one basket
It means that you shouldn't risk all of your capital in a single position or investment. This is a very risky move because if the trade fails, then you'll instantly lose all your money. Instead, invest in several potential trades to diversify your portfolio and minimize your trading risk.
- Don't use too many different assets
Concentrate and focus on the most important currency pairs only. If you use too many different ones, you will have a hard time monitoring all of the prices and updates.
- Learn to walk before you run
If you still don't have a clear idea of what forex trading really is, then don't force yourself to trade just yet. There is a bunch of free and paid educational resources that you can find on the internet these days, so try to understand at least the basics of trading before you jump into it.
- The market is always right
Accept the fact that you don't have the power to control the market in any way as a retail trader. Don't be upset if the market suddenly changes direction unexpectedly and makes you lose money. Remember that you need to understand the market, not the other way around.
- Know when to stop
It's wise to exit the market when your trade is in the red zone. This does not mean that you're a bad trader, but perhaps the market condition simply doesn't match your trading strategy. There's always a chance in forex trading, so if this happens, just wait for another great opportunity.
- Take care of your physical and mental health
Forex trading could take a lot of energy, both physically and mentally. So, you need to maintain good health in both aspects.
- Don't be greedy
Once you reach a certain target, don't rush to open another trade immediately. You need to keep thinking rationally and wait for the right time to trade instead of being greedy and entering the market blindly.
In conclusion, trading psychology is a key aspect for any forex trader apart from trading skills and knowledge. Hopefully, this article could help you trade better and be more successful, especially when it comes to controlling your emotions.