FX TRADING PSYCHOLOGY
hours and the intensity levels can be exceptionally high. Traders aſter a long day in the markets can feel mentally and physically tired. As you begin to tire, your risk of error is greatly increased (hence the tight working hour controls placed on people in safety critical environments) and your performance levels will decline. Firstly, ensure that you are managing your physical energy to counter this decline. And secondly, monitor your energy levels throughout the day so that you can be aware and respond accordingly should they go beyond your desired level for good performance.
EMOTIONAL/PSYCHOLOGICAL
• Loss of confidence in trading strategy; lack of understanding of probability and statistics. Sometimes you will get a run of losing trades for no other reason than the fact that you are trading in an environment that contains randomness (the market) and you will not know the distribution of the outcomes of your strategy. Losing streaks are not uncommon or unnatural. If you toss a coin one hundred times you will get at least four strings of either four heads or tails in a row, and potentially you can get five, six or more in a row. When you understand this, coping with a string of losses is easier; and the temptation to try and recklessly recover them is lessened.
MENTAL
• Environmental/external distractions and quiet times in markets – or just plain boredom – is the first mental issue. One of the biggest revelations that many new traders experience is that trading is not a 100% full-on, adrenaline-fuelled rollercoaster! Tere are oſten long periods where not much is happening, and the markets are quiet. Te danger here is that you get bored and trade just to do something, and not because a trading opportunity as defined by your strategy has arisen. Ask yourself – are you trading to relieve boredom or to make money? Find other tasks to do while the markets are quiet – reading, research, strategy development and so on.
• Fatigue and mental overload lead to poor concentration. As well as being quiet, trading can equally have very long
34 FX TRADER MAGAZINE April - June 2014
• Anger and frustration following losses/poor trading can be dangerous. Te changes that occur to your physiology and psychology when you are angry and frustrated affect your ability to make objective and reasoned decisions. You are greatly at risk of trading emotionally and not objectively. Take time out and wait until you are in a good trading state before re-entering the markets.
• Overconfidence resulting from a string of successes is the flipside risk. Overconfidence is a dangerous feeling – it will get you involved in the markets and with bigger positions than might be appropriate! Create awareness of when overconfidence might occur for you; and, where necessary, stop trading, or consciously manage your positions.
• Unwillingness to accept losses (loss aversion/ego) is a common problem. If you are not willing to take a loss then you are always likely to run one and to move stops. Accepting losses and dealing with them effectively is key to disciplined trading.
• Taking on too much risk. High risk creates higher stress, and higher stress creates stronger anxiety and worry; all this weighs down badly on your decision- making ability. Excessive positions also carry with them the potential for huge painful losses that no one wants to take. So taking appropriate risk is a key necessity of, as well as component in, disciplined
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