Trading  psychology is a key to success in the forex market.  As human beings, we are inherently sensitive creatures, which dictate our judgments. Although these emotions are not necessarily wrong, how we react to them is what matters, especially when trading currencies.

If emotions get the best of you and you fail to control them, illogical decision-making crops up. Eventually, even if you are an experienced trader, losses start accruing even in trades that could have been profitable. Some traders think that divorcing themselves from emotions could solve their problems. However, that’s impossible—if you are still a human being. If you use the feelings well, they may assist in accelerating your trading success. It deals with the emotional state of a trader when entering and exiting trades, looking for potential business opportunities or doing other business related tasks.

Nonetheless, even their analytical skills were not enough to save that firm from a spectacular collapse, as greed and euphoria overrode the dictates of reason, and leverage amplified the impact of false calculations.  Instead, too much confidence, enthusiasm, a lax attitude to risk controls were the main culprits behind the firm’s demise, and it is possible to tie these factors to emotional faults with ease. Usually, most traders experience losses because of negative emotions that poison their rational decision-making processes and cause them to make improperly planned trade decisions. While the results of one simple mistake can be readily corrected in time, the damage done by these beings is chronicle.

But let us remind you that the rewards of a successful battle with these troublesome beings can be unlimited. The trader who masters the psychological aspect of trading has walked two thirds of the way to riches, and all the rest is just a matter of patience and study, before the inevitable outcome of wealth and prosperity is attained. Trading more, taking bigger risks because of your happiness, usually ends in more losses than wins.

Let’s start by talking about the four main psychological obstacles to successful trading.

• Fear
• Greed
• Revenge
• Euphoria

1. Fear

Fear is the natural reaction we display to threats that could cause us harm. Being fearful is normal. In fact, the emotion is regarded to be crucial to our survival. Without feeling afraid, it will be difficult to notice danger and escape from it.However, in forex trading, fear is harmful when we allow the perceived loss-making threats to cause us to make irrational and unsound decisions.

Instead of motivating us to execute trades without worries, fear draws us back from making trades, convincing us that we are wrong. This fear of being wrong overrides the power of our analysis and the amount of time we’ve taken looking for good setups and points us to the darker side of the market.

Another type of fear is that of missing good trades. This fear often makes us enter trades at any price, without waiting for the appearance of profitable trade setups. A fearful trader who does not want to miss good opportunities frequently disregards a rational approach to trading and allows excitement to overrule their decisions.

The last type of fear, which is even more dangerous, is that of loss. The fear of failure causes a psychological scare in our minds and send us dreadful warnings before making trade decisions.

For example, let’s say you have a long running position on the EUR/USD currency pair, and bad news comes regarding the state of the Eurozone economy, what would you do?

In such situations, most traders will feel scared, overreact, and quickly close the trade without a second thought. Even though they may be taking action to avoid losses, fear usually drives such decisions and could lead to missing out on the possible gains.

Fear in forex trading usually leads to ruins: as fear pushes traders to make unfounded decisions, their trading accounts get depleted slowly by slowly—until they receive margin calls.

So, when is fear good and when it is bad?

If the fear of failure or rejection holds you back from doing something that could ultimately benefit you (a common fear nowadays), then we’d have to argue that this is considered a ‘bad fear’. In this case, you would be letting fear create exactly what you’re afraid of. If the fear of failure pushes you to work harder to avoid failing, nevertheless, then we’d argue that this is a ‘good fear’. Fear, quite simply, is ubiquitous. And there is very little one can do to avoid it.

2. Greed

Greed is even more dangerous than fear. Greed is a typical human trait, one on which the whole human society is based, of course to some extent. Each person has an instinctive desire to do something better, even the most lazy people, and to try to get a bit little more out of a certain situation. Let’s put it straight: every forex trader yearns to get substantial returns from their efforts.

However, this yearning becomes unproductive, even harmful, when it’s too powerful. Nothing is wrong with the desire of realizing financial success in forex trading. But, if these greedy desires suffocate your common sense and drive your trading decisions, then there’s everything wrong with them.

There is a very popular old saying among investors that “pigs get slaughtered” while bulls and bears make money. It means that the “greedy pigs” are bound to lose their money eventually, because they tend to hold to winning positions for an extended period of time in an attempt to milk each possible pip out of the market. And this doesn’t come cheap, because it goes along with a huge risk of getting whipsawed by the market.

As such, the psychological emotion of greed is even more harmful than fear. Fear can prevent you from making trade decisions or make you exit too early. Conversely, greed compels you to push the buy or the sell button in a manner that’s far too risky. That’s why greed can be much more destructive than simple fear.

Since greed pushes us to act irrationally, it’s a very dangerous emotion. Just like drinking alcohol, greed can prompt you to behave foolishly when it has intoxicated your system. If greed cripples your trading choices, then you’re drunk with it, and you’ll soon wipe out the trading account.

For example, traders intoxicated with greed usually fail to exit their winning positions because they think the market will forever obey them. Greedy traders also add to open positions whenever the market has moved according to their expectations. Other dangerous behaviors of greedy traders include overleveraging, quickly jumping into trades, and overtrading.

So, when is Greed good and when it is bad?

Greed, for many, is often actually one of the motivations to initially get involved in trading. Quite frankly, we don’t feel there’s anything wrong with this, since, as we explained above, without greed little would be accomplished in life. Well a certain amount of greed is good because it’s needed to make speculators want to trade in the first place. A downside to greed is when it causes traders to ‘chase the market,’ for example by buying after a large sudden move higher when the market is overbought

You also need to avoid being too greedy when exiting your trades i.e. you should take profits where your proven trading method says you should.

3. Revenge

Revenge is another perilous emotion that obstructs trading success. Revenge trading usually takes place when traders try to make more aggressive trades, especially after experiencing losses. Whereas the primary intention of revenge trades is to try to win back the losses, it often results in more losses than initially intended.

Revenge traders often blame the market for their losses and end up placing retaliatory and miscalculated trades. Revenge trading is harmful because of three main reasons. First, since it’s usually not planned well, it leads you into making hurried trades that are less likely to be profitable. If you engage in revenge trading, you will be gambling and not trading. You will speedily place trades without any planning or comprehensive analysis.

Secondly, because you become desperate to recoup the losses, revenge trading forces you to open trades with larger position sizes. You will ignore the risk management part of your trade plan just because you want to win back the losses quickly.

Lastly, it is an emotional trading habit that’s driven by the wrong motives. It changes your focus from rational trading decisions to emotions-driven trading choices. Your emotions cloud your thoughts and make you throw discipline and sound mind out of the window, which bleeds your account—pip by pip.

For example, you can enter a long order on EUR/USD, but you end up losing 50 pips. Frustrated, you decide to double your position size on the next trade so that you can recoup your initial loss. However, the trade goes contrary to your expectations again, causing further damage to the trading account. It will be easy to open an even bigger position now, because the market “owes” you money and you want to take “your” money back.

So, when is Revenge good and when it is bad?

Emotion of revenge trading sometimes you get crazy at the market. Angry, an determined to come out on top, the traders will findthemselves in one of two scenarios. They will either end up ploughing a lot of money into a trade that loses, making their losses even bigger, or they will manage to come out on top a little, and simply reduce their loss. Financial Market Traders have a feeling of having revenge on the market when they are experiencing a losing trades that they are confident they will sort out. For fewer thought out trades, it moves the attention from your trading process and good risk management to trying to make enough money to recover your losses.

4. Euphoria

Lastly, euphoria can also cripple your trading success. It is the feeling of excitement often realized after experiencing several big wins in the forex market. Your euphoric state convinces you that your understanding of the movement of currency pairs is perfect and your analyses are faultless. While it is normal to feel excited after winning a trade, overconfidence can result in problems.

For example, because you placed a long order on EUR/USD and made a win, this doesn’t mean that another trade will automatically result in a win. The market does not work like that.

Euphoria often leads to a slippery slope of trading errors and losses. After a series of successful trades, a trader can become overconfident and start placing trades without careful analysis of the ever-changing market conditions.

Overconfidence can also cause you to risk too much capital, falsely believe in your analysis, or forget about your trading plan. Having a party after each successful trade is an emotional motive that can increase your trading flaws.

So, when is Euphoria good and when it is bad?

Euphoria is a feeling gives you a confidence boost in the belief you’re doing a good job of reading market movements and making the right decisions. Euphoria works hard to ensure that wherever we look, we see nothing but wonderful prospects for limitless profits. It is as if the trader has somehow been blessed with the Midas Touch, with success being the natural consequence of his routine behavior. Euphoria has little relevance for most traders, because most are aware that success in forex trading is not child’s play.  The best way of avoiding euphoria is by understanding that a string of wins or losses does not impact the outcome of the next trade that we will make.

How does one look at controlling all these emotions?

While we feel it is impossible to completely remove these emotions from trading, here are some methods one can utilize to help minimize the impact.

• Risk what you feel comfortable with. If that is 0.5% of your account, then so be it. This helps one remain objective.
• We know it’s difficult, but try to limit your expectations. What we mean by this is avoid thinking that this trade or that trade should win. An individual trade, if sized correctly, has very little effect on the overall results if one thinks in probabilities.
• Trade with money you can afford to lose.Trading beyond your means is a sure-fire way to make one emotional. Trading with money needed for food or housing is reckless.
• Treat trading as a business. Have a business plan in place with specific goals.
• Consider taking a break after three consecutive wins or losses.A losing streak can make you feel, well, like a loser, which can promote revenge trading. And a consecutive number of wins can make you feel like you’re untouchable. Learn to recognise these signs. Take a day or two to gather your thoughts after such an event, as trading to revenge your losses will not likely do your account any favours, and trading when you think you’re George Soros could have you over leveraging.
• Try to avoid looking at your profit/loss during the trade. By removing this from view, you’re partially eliminating the financial element from the trade. Try to focus on pips/points.
• Change your mindset An unrealistic mindset is a major cause of emotional trading. If you are not focused and composed in your trading decisions, you will easily adopt the dangerous habit of being fearful, greedy, revengeful, or euphoric. You need to have a realistic mindset and become an emotionally mature trader.

Conclusion

The psychology of forex trading is an essential aspect of becoming a successful trader. For most traders, this is what triggers the biggest percentage of trading mistakes.

Therefore, you need to strive to keep your emotions in check. If you fail to control them, they will surely control you—and you’ll regret the trading decisions the emotions lead you into.

The success or failure of your forex trading career depends on your expertise at eliminating emotions from trading decisions, and in that expertise resides the alpha and omega of profitable currency trading.