Trader’s Psychology: Attributes for Success

Successful trading depends, in my opinion, 80% on psychology and 20% on methodology. This is why self-knowledge and studying one’s own behavioral patterns represent the key to success.We all well know that the Forex market is highly volatile and that generally decisions have to be made in very short spans of time. Uncertainty dwells above all things, and though nowadays we can count on many tools and techniques, nobody knows for sure what will happen to the market prices. In front of a bearish trend, nobody knows exactly what is going on and how far down will they go, if price rises, the question is up to what level will we risk in order to avoid sacrificing profits made. All these issues bring up a great deal of anxiety and nervousness among Forex traders, who often end up losing their money because of hurried decisions.

Emotion control and stress management

Taking into account the fact that everyone has access to the same news, the same numbers, indicators, statistics, etc… then what makes the difference between winning and losing traders? The answer is that the first ones keep their emotional stability at all times, they can handle the pressure of risk and control their emotions. They understand that losing is a part of the business. They trust their methods and systems, which in turn gives them peace of mind and knowledge that the losses only represent small pullbacks which will last for a little while and then they will be able to recover.

The most important thing is to enter the market with calm and confidence that everything is going to be all right. Plan our strategies in advance and trade under their rules will give us a greater sensation of security.

The control of our own emotions can be achieved through: Trusting the probabilistic model, being psychologically prepared to lose, trading without fears and self-criticism. We shouldn’t settle down for our current way of trading, but instead research the mistakes and design techniques to correct them in future events. Keeping a record of failures is quite useful to get rid of bad habits and avoid to fall again into them. All this as a whole will bring us a greater confidence and calmness in difficult times.

The question that arises among newbie traders is: When do you know that you are prepared? That is, when do we have enough knowledge (of the market as well as of ourselves) and when do we become conscious of what we have learned and of the sensation of one’s own emotions when we apply it. That is, when we are conscious of one’s own internal states, resources and intuitions and when we can do a correct assessment of one’s own strengths and weaknesses as traders. All this brings us up to a conclusion: Self-confidence, giving value to our technical and emotional abilities.

Emotional competences required are:

A-Self-control: keeping under close vigilance the disturbing emotions like extreme fear or on the contrary sensations of absolute immunity, as well as impulses that do not correspond to your trading plan.

B-Dependability: keeping adequate standards of honesty and intellectual integrity, based on an adequate training and the predetermination of the actions to be taken in winning or in losing situations.

C-Consciousness: assuming the responsibilities of your own business, and of the destiny of your trades.

D-Adaptability : having enough flexibility to accept the changes of the market and positions.

E-Innovation: accepting the new information, or new perspectives, previsions or ideas that adapt better to the new situations.

As to stress management, taking periodical resting pauses helps to fight this and avoid to feel overwhelmed. In difficult times it is recommended to get out of the surroundings, and renovate the energies preferably outdoors. Practicing breathing exercises is a very effective habit also, it helps to lower the pressure and to recover a clear thinking. Accepting one’s own limitations also helps in relieving the tension. Pressuring yourself with ambitious profit targets and bringing yourself to the edge will only generate more frustration, which will diminish productivity in a large extent.

Discipline

In Forex, each trader will be the only one responsible for his or her own decisions and actions, and will have to respond to the consequences. This requires a great discipline and acceptance ability. Self-knowledge is as much as important in Forex trading as the knowledge of the facts, economical theories, news and methods. It is very common to see how emotions often take the lead and make you forget every tool and indicator. People who possess emotional self-control and discipline will have greater possibilities of achieving a successful and winning performance.

However, it is not easy to do a self-analysis in order to identify our strengths, weaknesses and personal inclinations because by nature, our perspective is subjective. To achieve this we require to be eager to exert total honesty with our selves and accept the results that our inner observation will bring out. Admitting our mistakes is a very positive trait both in Trading and in life, and will allow us to understand the reasons of our losses and help us avoid these situations next time. It is possible to isolate weaknesses and work on them, in the same way you can review and work upon your trading method.

Inside discipline we can find the habit of information. A professional trader must be accustomed to check the market information as a routine (read news, subscribe to alerts and bulletins, verify indicators, etc.) This will give the trader enough confidence to operate upon a precise and objective information which, along with the planned strategy, will help avoiding despair and impulsive actions that could lead to considerable losses.

Hence, discipline implies:

-Education. Outline and follow up a training plan, to acquire all the required technical knowledge.

-Self-analysis. Perform a thorough analysis of your own strengths and weaknesses, to profit from the former and work upon the latter.

-Planning. Outline an operational plan, including trading strategies and methods.

-Goals. Outline reachable and measurable objectives. Recheck them often and compare with the results, analyzing the reasons for discrepancies.

-Information. Perform a regular check of market information and indicators.

-Self-control. Practice stress and emotion Management techniques. Self-diagnose and recognize your own emotions.

Fear and greed: Two sides of the same coin

Fear and greed are the two sides of the same coin. Both can lead to losses even if the reasons might be completely opposed.

FEAR: Arises generally when bearish trends start and the trader lets himself be taken by despair. The impulsive reaction in this case is to close all positions very fast to avoid greater losses. The point here is that many times those are only temporary spikes which reverse later on. The trader who acts calmly and verifies first the indicators and trends, will have more probabilities to profit from trend changes and thus avoid losses. This is the reason why in these cases it is better to set up a stop-loss and stick to it, as under the heat of the moment you will be less able to think with objectivity and reason.

GREED : This is the opposite issue from fear. It happens when profits increase and the trader cannot gauge on time the appropriate moment for exiting the position, always hoping to get some more from the market. Of course this also comes to a peak before the fall starts, and in the best of cases the trader will get smaller profits but in the worst cases losses could even become a part of the picture.

To avoid getting caught by these emotions, it is important to understand that both parameters, Stop-Loss and Limit (or Target Profit) have to be set in place before each trade, based on technical and fundamental analysis, and thereafter RESPECTED.

Remember:

•Stop Loss: how much am I prepared to lose
•Limit: how much do I agree to win

As a summary, the desirable attributes on the profile of a successful Forex trader are:

-Self-control (manage emotions and stress)
-Discipline (outline a plan and follow it, respecting the planned strategies)

-Self-confidence (coming from our knowledge of the market and self-knowledge of our strengths and weaknesses)
-Acceptance ability (being psychologically prepared to assume risks and accept losses)
-Tenacity and perseverance (Forex market is long term, you have to know how to wait and persist on your trading in order to reach the profits objectives, and not be disappointed upon the first drawbacks)
-Adaptability (Keeping an open mind and being receptive to new ideas and changes of the market)
-Self-criticism (to learn from your own mistakes)

-Tolerance to pressure
-Perception and common sense (perceive the opportunities that arise on the market and distinguish those that are highly profitable; elaborate your own expectancies about what the market could be doing next)

-Selective mind (ability to differentiate between the general currency markets forecasts and the actual market positions, avoid thinking about the market from the perspective of an open position that you might have).