This week’s question comes from Yusuf, who asks:
My technical abilities have improved, but I still struggle with the psychology of Forex trading. I’m always fearful of giving back gains and have trouble keeping profits after the trade. What should I do?
I think you’ll agree with me that mastering the psychology of trading is no walk in the park.
I would argue that developing a winning mental game is harder than crafting a profitable trading strategy.
Throw in the fact that successful trading is 80% psychology and 20% mechanics, and it’s no wonder so many traders struggle.
Want the good news?
Trading psychology can be learned. It isn’t something you are born with nor is it something that’s acquired by accident.
So no matter the mistakes you’ve made, or what you already know about Forex trading, you CAN develop discipline and a winning attitude.
I couldn’t possibly include every aspect of the topic in a single post. However, what you’re about to read will change the way you view market risk and any fears you’ve developed.
By the time you finish this post, you will be able to identify and correct the mental mistakes you’ve been making. And considering that success is 80% psychology, you’ll be well on your way to consistent profits.
Ready to improve your trading psychology? Let’s begin.
Learn to Embrace Market Risk
Do you consider yourself a risk-taker?
The answer to this question depends on several variables. Everything from your childhood to your social interactions will influence the way you respond.
Let me take a more universal approach…
Are all traders risk-takers?
If I assume that engaging in an activity that is inherently risky makes one a risk-taker, then the answer is yes.
However, not all risk-takers in the trading world are created equal. Far from it, in fact.
The best traders in the world don’t just take risks. They don’t sit down at their trading computer in the morning with a daredevil mindset and search out risky endeavors.
Sure, they face some of the same risks as every other trader in the world. But what separates these individuals is that they don’t just take a risk, they embrace it.
Did you fully accept and embrace the risk prior to your last trade? Did you stop and reflect on what you were about to do?
There’s a big difference between knowing that something is risky and embracing it as such. To do the latter, you have to convince yourself that there are no guarantees.
You have to accept the fact that your analysis could be wrong. Not only that, but also recognize that you could lose every penny you bet on that trade.
Taking a trading loss is never fun. Not only do we have to admit that we were wrong, but we also lose money in the process.
That’s a hard pill to swallow.
The antidote is to fully embrace the risk before entering a trade. The more you try to avoid it by imagining all the money you stand to make, the worse your fear becomes.
Improve Your Trading by Taking Responsibility
Everything that happens to your risk capital is your responsibility. No matter if you lose one trade or blow an entire account, it’s all on you.
It doesn’t matter whether it was non-farm payroll Friday or a bank rate decision that triggered the loss. Even unexpected events like natural disasters can’t take the blame for your losses.
Every financial market is neutral. It has no bias or opinion about rate decisions or the like.
It just exists and moves with the flow of information.
Some traders may argue this point and say that a market in an uptrend is bullish. Or one that’s carving lower highs and lower lows has a bearish bias.
That simply isn’t true.
No market has a bias. You or I may have one, but the market always neutral.
Think about that for a moment. If you’ve ever tried to blame the market for a loss, you’re attempting to place blame on an inanimate object that is always neutral.
How does that make sense?
It doesn’t. I’m not criticizing anyone who has tried to blame the market for a negative outcome. I used to make this same mistake.
In order to improve as a trader, you must take full responsibility for your actions. Otherwise, it’s too easy to use the market or any other individual or service as the scapegoat to place blame elsewhere.
This is one reason why I’m not a fan of signal services. Not only do you not get to learn how to trade on your own, but they also make it far too easy to deflect responsibility.
Make the commitment today to start taking full responsibility for every outcome in the market. If you do, I can all but guarantee that you will see drastic improvements in your trading performance.
4 Psychological Roadblocks to Successful Trading
In order to determine why you make certain trading mistakes, you first have to identify the source.
This isn’t as labor intensive as it sounds. In fact, for us traders it’s quite simple.
All fear in the market stems from the following four categories.
1. Being wrong
Nobody likes being wrong. It doesn’t matter if you’re a trader or a computer programmer, being told you’re wrong is never fun.
However, it’s a necessary part of trading. You can’t realistically expect to make money without fully accepting the fact that there’s a risk your analysis is wrong.
No matter how good a trade setup looks, there’s always a chance it won’t play out in your favor.
But you know what?
That’s okay. It’s just the market’s way of feeding you information.
The worst thing you can do as a trader is to take this type of feedback as a personal attack.
It isn’t. The market doesn’t know whether you bought or sold nor does it care.
The market is always neutral regardless of the circumstances. The only bias is your own.
So the next time you feel yourself getting upset at a loss, remember that it’s just constructive feedback. What you choose to do with that feedback will make or break you as a trader.
2. Losing money
Apart from dying, or maybe public speaking, the fear of being wrong and losing money are at the top of most people’s list of fears.
Unfortunately for traders, we get to face being wrong and losing money at the same time.
It’s little wonder why trading is so difficult.
But just like being wrong, when the market takes money from you it isn’t a personal attack.
Rather, it’s the cost of doing business. Just like the bagel shop on the corner, we have expenses too. Things like commissions and financing charges belong to this category.
However, trading losses are also a business expense. This is why I often say that if you want to become consistently profitable, you have to ensure that your winning trades pay for your losers.
One of the best ways to reduce the fear of losing money is to risk less per trade.
That may sound obvious and I suppose it is. But as long as traders continue to risk too much of their account balance, I will continue to offer it as advice.
3. Missing out
The fear of missing out, or FOMO as some like to call it, is perhaps the leading cause of mistimed entries.
When trading a breakout of any kind, waiting for a pullback to the broken level offers the most favorable entry. It offers the best risk to reward ratio and often gives you the most logical area to hide your stop loss.
But how do you know if the market will pull back for a retest?
You don’t. This is when the fear of missing out creeps in and takes over.
Instead of waiting patiently for the pullback, you enter with a market order. Unfortunately for you, the market decides to retest the breakout area and you’re soon dealing with a losing position.
I’m sure you have faced a similar situation; we all have.
But here’s the thing…
You entered early because you feared missing the trade, right?
In other words, you were focused on the rewards but not the risk.
Remember, there’s a big difference between being a risk-taker and accepting that risk. If you had fully accepted the risk of entering the trade early, you probably wouldn’t have made that mistake.
4. Leaving money on the table
Sometimes this can feel worse than taking a loss.
You get the ideal entry on a EURUSD bullish pin bar and book a 50 pip profit. It feels great until you notice that the pair is 200 pips higher by the end of the week.
In some cases, there’s nothing you can do about this. But that doesn’t stop it from being one of the four pillars of fear-based trading.
Unlike the fear of missing out, this type of fear usually leads to a lack of profit taking. So instead of booking profits at the area you planned ahead of time, you continually move the profit target further away from the current price.
That may have worked in the EURUSD example, but most often it results in less profit or worse, a loss that could have been avoided.
I use a simple rule to avoid this fear-based mistake.
I’m only allowed to move the profit target closer to my entry while in a trade. I can never move it further away.
Most often though, I never move it at all after entering a trade.
The mental game is the most important aspect of successful trading. It’s the only thing accountable for the mistakes you make in the market.
That’s because every market is neutral. Any bias or opinion you have stems from your analysis; the market is simply feeding you the information.
Your job is to compute that information in a way that allows you to make money over a series of trades. The only way to do that is to embrace the risks involved.
It isn’t enough to tell yourself that trading is risky. Anyone who has traded Forex or any other financial market knows that to be true.
If you want to achieve consistent profits, you have to embrace risk and hold yourself accountable. Whether you win, lose, miss an entry or give back profits, you are accountable for the outcome.
Once you accept these facts and eliminate your fears, it will have profound implications on your bottom-line performance.
In Memory of...
This post is dedicated to the late Mark Douglas. His book Trading in the Zone is the authority on trading psychology.
If you want to learn how to stay disciplined, gain confidence and develop a winning Forex attitude, then I highly recommend this book. You won’t regret it.
You can buy a copy of it here: Trading in the Zone by Mark Douglas
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.
Thank you Justin. great article. Very well explained that FOMO and mis-timed entry go hand in hand. You wait for a pull back and it never happens until you enter.
Always my pleasure. And you’re right, fully embraced market risk doesn’t allow for FOMO. If you do begin to experience the fear of missing a trade, it means you aren’t focusing enough on the associated risk.
I read ‘Trading in the Zone’ to set my brain right every time is sense myself derailing. Thanks for this post Justin.
It’s a must-read for sure. Thanks for commenting.
Oh yes very true, just read that last month very sad to hear that he is late didn’t know. Really liked his references to real life situations, Specially about a boy who was beaten by a DOG in his first encounter with it but later realised that a dog can also be friendly, etc….Really enjoyed it….Two things can happen YOU WIN A TRADE or LOSE IT…..then you’ll never be hurt. a DOG can be friendly or hostile. RIP to the author.
Absolutely. He breaks it down in a way that highlights market neutrality. It then falls on our shoulders to embrace risk so that fear is no longer a factor. An incredible author and human being.
Wao, you really kill forex with this post.Right trading psychology is the most important tool. You always advise us to take small risk and this has been helping me. I can now leave some trades I entered for weeks without any fear. Your teachings are helpful. I always look forward to learning everyday.
Cheers, Ismo. That’s great to hear that you’re able to let trades run without fear. It’s amazing what reducing your risk can do. Thanks for commenting.
Great article Justin! i have and already read Trading in the Zone. And once again is nice to remember Mark’s words of wisdom. Reading this is a signal that i am in the right track. Thank you for sharing.
Hi Justin,Thank you for the sharing. This is a great write out that I read so far. It write out my trading journey as well. I love it.. I will keep reading your post until I make it right. Thank you…
Great article Justin .. only to often does the market offer illusion if we hunt for trades or try to wing it as we are in fear of missing out ..,my recipe to success as my 50 cents worth if it helps … spend less time hunting trades .. and when you do find an entry that fits your rules of confluence.accept the results and walk away win or lose . Stay away from the charts for at least a week then re-commence your analysis process to find a new setup . Never jump straight back into a trade immediately after finishing a closing position. Your mind needs time to reset from either the highs of the win or the remourse of the loss . Both are dangerous. Cheers for your articles . Inspired trader .
Thank you justin
You did well
I several times want to attend your webinar, but after time counter finish, there is error message,
the media could be loaded either because the server or network failed or because the format is not supported.
Nice post Justin. Yep, for all the technicals, it is the psychology that determines the success of a trader. Excellent post.
Always on point… Thank u Sir
Well informed write up. My question is when was the last time you blew your any account as a result of greed or poor mental psychology?
Cheers. A very long time ago.