6 Must-Have Trading Mind Tools
Forex trading is a constant learning curve. An understanding of how the markets work and a grasp of some technical analysis tools are essential to make a good start, and get going with profitable trades. Once you have a solid trading strategy in place, it’s also important to understand yourself a little more deeply.
This may seem like a strange concept which has little to do with the world of currencies, percentage points, and candlestick charts. However, when you begin to unpack the psychology of what you are actually trying to achieve, it all starts to make more sense.
Ultimately, you are trading to make a profit for yourself, by taking controlled risks. This brings out two powerful and primal human emotions in even the most stoical of people: fear and greed. More specifically, it is a natural instinct to fear loss, and it is also natural to pursue personal gain.
No matter how thorough your knowledge of the forex markets, or how good your technical strategy is, without the right mental and emotional discipline, you will always be faced with a huge obstacle to better trading decisions.
To stop your instincts fighting against each other and hampering your efforts, you need to have some psychological tricks in your toolkit. Here are six of the most important tools to know about.
Know your biases
The first step is to accept that at some point you will feel emotions, such as excitement, greed, anxiety, and so on, no matter how calm you feel before starting trading. Understanding your particular weak links is the first line of defence. As human beings, we are all subject to unconscious biases in our worldview, and the same applies to trading.
One of the most common biases for inexperienced traders is overconfidence bias. This is often a stage that traders go through after their first run of successful trades. Everyone has an ego which needs a boost now and them, but in forex an overinflated ego can be the road to ruin.
Even if you are experiencing success, remember that it is rarely a consistent pattern in forex trading. Even experienced traders consider a 50% success rate to be good going. Convincing yourself that you know what you are doing, and you can ease up on the hard slog of daily reviews and analysis, will soon trip you up.
Instead, stick to your game plan, and don’t be tempted to loosen up your risk management strategy when faced with a string of winners.
Loss aversion bias is another common trait of new traders. It stems from the tendency to fear making a loss over pursuing a gain. This is a natural human trait, rather than a personal weakness, and it is a way of protecting ourselves from taking risks.
The fear of losing is a stronger motivator than the elation of victory in most people, which is possibly the result of evolution, where it was more important to avoid predators and stay alive, than to hunt down extra food. However, forex trading is all about taking managed risks, and an over-cautious attitude will hamper your progress.
Be wary of your comfort zone
Once you have a little experience and some success under your belt, it can be easy to settle down into a comfort zone. The human mind has a natural tendency to cut corners, and repeat past actions rather than venture to learn new ones. This has a necessary purpose, to make carrying out routine tasks quicker and easier.
However, forex trading is all about being ready for the unexpected, and staying in a comfort zone will soon mean you are in a danger zone. You need to be constantly looking ahead, at not assume that past strategies will always work for you in the future. While a consistent approach is important, becoming blinkered to new influences will mean you get left behind.
Keep up with the economic news, and make sure you understand how socio-political events influence the forex markets. We are currently living through turbulent times, so it is more important than ever to be on top of your knowledge, and be flexible in your attitude to trying out new techniques and strategies.
Know your personality type
While there are universal human traits which we are all prone to, we also have individual personalities. These are the result of our genetic inheritance, our upbringing, and the life experiences we have accumulated so far.
Instead of trying to separate your trading mindset from your natural inclinations, it’s better to understand what your dominant personality type is, and work with it, rather than against it.
Start by asking yourself a few questions, such as how patient, or impatient, you are. Do you thrive off making quick decisions, or do you prefer time to digest things? Are you disciplined and good at sticking to routines, or are you an impulsive person who likes to use their intuition?
Do you enjoy spotting patterns, and have strong spatial recognition skills? Do you prefer to get down with details, or assess the bigger picture? How do you act when you are under pressure: can you make quick decisions without panicking, or do you clam up with fear and indecision?
There’s no one single personality type that is most suited to trading: it’s more about recognising who you are, and playing to your strengths. If you’re good under pressure, comfortable with making snap decisions, and have a sharp eye for detail, you’re likely to thrive as a day trader, making a series of quick wins.
If you prefer space to think things over, are patient and methodical, and like to analyse the bigger picture, you may be better suited to swing trading, where you hold positions for longer.
Filter out the noise
We will always recommend that you learn as much as you can about forex trading before you start, but it is important to be selective about what information is going to be relevant to your personality and circumstances. For example, if you are going to be fitting trading around your day job, you may need to focus on day trading or swing trading.
Burying yourself in a miasma of tips, tricks, and techniques is likely to leave you paralysed with indecision, as it is impossible to act on all of it. Chances are, you will feel overwhelmed, and lose your appetite for trading completely. Instead, work on refining the plethora of information available, so that you filter out the least relevant stuff.
This can be difficult, because even if you have a well-suited finely tuned strategy, you are still going to experience some setbacks, especially at first. Be prepared to keep learning, and make tweaks and adjustments, until you find out what works best for you. Traders sometimes refer to this sweet spot as finding their ‘edge’.
However, don’t become fixated with the idea that there is one perfect strategy out there which will be the answer to all your prayers. There are literally hundreds of different approaches to trading forex, and lots of them could work equally well for you. Searching for the holy grail will just mean a lot of wasted time which could have been spent trading.
Accept that the market is random
Accepting the random nature of the forex markets doesn’t mean that you should abandon a strategy and simply gamble. Rather, it means that accepting risk and losses are all part of the game. Even very experienced traders make losses, but they don’t get defeated by them.
If the losses become out of line with their expectations, they review their records to work out what might need some adjustment.
They then make some tweaks, maybe accept they were wrong, or just that they needed to respond to a change in the market movements, and then they carry on trading. It’s about averages and probabilities, not being always right or wrong, because literally no trader is. As long as you define and manage your risks, you are on the right path.
Align your lifestyle with your trading mindset
So you have accepted that we all bring human emotions into trading, and are aware of how these might influence your behaviour. To keep yourself in the optimum frame of mind, it can be really helpful to make some lifestyle adjustments.
Eating healthily, so that you are keeping your brain and body well supplied with nutrients, is very important. Poor nutrition can lead to poor sleep, poor concentration, and make it much more difficult for us to control our emotions. Exercising frequently also helps to manage stress, and keeps us feeling mentally alert and at the top of our game.
Many traders complement a well-balanced lifestyle with a meditation routine. This could be anything form 10 minutes in the morning, to a full hour. There is a huge range of advice out there on mindfulness techniques, which help you to clear the mind of everyday mental clutter, and improve your focus and concentration.
If you are looking for an instant funding prop firm, please get in touch today.