The most effective foreign exchange traders are those who have knowledge of the forex market and how to trade on it, as well as an insight into their own behaviour and cognition as a forex trader. This individual is aware of the psychological experiences they feel when FX trading on this volatile market, as well as how these experiences can affect their mental health. They also understand how this influence can impact on their trading and thus the outcome of their trades.
In order to become a successful trader you must attain the different skills necessary to manage all these aspects of the foreign exchange market. You must be able to develop foreign exchange trading systems that not only allow for profitable trading outcomes but psychological sound trades as well. This can be done by being aware of your mindset when FX trading. Evidence has shown three basic psychological approaches that lead to detrimental behaviours and losses.
1. Anticipation FX trading addiction
Trading addiction has been noted as the addiction to that euphoric feeling a trade. However, FX traders have been seen to be addicted to the anticipation felt before a trade is executed. It is that emotion of desire, the stomach churning feeling or ‘butterfly sensation’ that creates this mental perspective. This is a complicated emotion as it is linked to a future behaviour instead of a present one. Furthermore, it is either a positive or a negative anticipation which can be enjoyed dependent on the trader’s personality.
The traders who find themselves addicted to this anticipatory emotion may refuse to continue with the trade. Instead of progressing and experiencing a potential favourable outcome, they will linger in the pre-trade phase. While this does not affect their trading financially, it does negate their functioning as an FX trader.
2. Sensory Bias
Sensory bias refers to a foreign exchange trader’s ability to base their views of the FX trading market on data received through their different senses. This generally refers to the information provided via forex news releases or other traders in a forex forum. It is odd to imagine a forex news release causing a sensory bias, yet they are the most influential aspects as this bias is based on interpretation of the data provided. This means that the trader will base his opinions on the currency price movements based on his interpretation of the news release. He may believe that his opinions are objective given that the news item is a fact, but the interpretation interjects subjectivity.
3. FX trading fear
While the foreign exchange market is unique in certain aspects, it is identical to other traders in others. One of these features is the high levels of stress and anxiety experienced by its players. For new traders this can be incredibly overwhelming as they have no experience of the market. One aspect of FX trading which seems to cause the most anxiety is the unpredictable nature of the trade. This market is highly volatile and despite the hours of analysis done for a trader, the trade will still contain a degree of risk that the market may swing in its timeframe. It is this uncertainty that frightens many traders can leads to an avoidance of trading. The avoidance can affect trading greatly as the trading strategy will be based on fear and more susceptible to losses than profits.