Mentality of a Forex Trader
Do you have the mental toughness to stay strong when you're down?
I find that us human beings for the most part are extremely predictable. We have a mob mentality and often follow, which actually makes life easier because only the minority become leaders. Imagine if most people wanted to lead, there would be chaos and nothing would get done.
In forex trading, having a strong, disciplined mind is one of the most important attributes to possess in order to be successful. Not everyone is born with it but it can be worked on through repitition because as humans, we are creatures of habit.
Trading psychology can apply to many fields of investment, even on something relatively common to all of us like gambling. A strong player will stick to the game plan no matter what and will not sway depending on how they are going. Losing 10 Blackjack hands in a row doesn't alter the strategy of a strong player, unlike the person who doubles each bet after a loss (known as the Martingale system).
If you think about trading psychology in forex from a very simple perspective of the common trader, you will quickly see that everything is a pattern, much like in life.
Candlestick patterns that everyone is taught
What's interesting to me is that as humans who like to follow, we are fed all these great candlestick patterns that all forex beginners recognise and act on. Have you ever thought about why the patterns work and mostly move in the direction as told by the pattern? It's because everyone is learning and following the same pattern and making the same trades in anticipation that it will be correct!
If enough people believe something and act on it, it doesn't matter if the minority are right, you will still get the outcome dictacted by the majority. Back in the great depression, does a wheelbarrow full of notes really equal the value of 1 loaf of bread? Who said so? The majority of people did, and that's what ultimately matters.
Do you have a currency note in your wallet or purse? Isn't it just a piece of paper? How is it worth whatever it's worth?
On the topic of being right or wrong on currency movements, what exactly is being right and wrong anyway? If I make a prediction and go long on a pair but it goes the other way, what exactly was I wrong about? All it means is that more people thought the other way. It's really just an opinion is it not?
Back to candlestick patterns, you should definitely learn all the common patterns and trade them. Not because I personally believe in them, but I know that the majority of people do and when they act, you better act in the same way. No point trying to be a rebel and go against the trend. But you won't and can't always win following patterns and that's when you need to be mentally strong and trade according to your strategy. Close the trade at your stop loss limits and wait for the next pattern to emerge. It's really that simple.
Merits of Forex EAs and Systems
It is on this topic of psychology where computers can and do play a role. Some people aren't fans of running EAs (Expert Advisors - automated trading scripts) but I think there is plenty of merit in running a system which can take all the emotional elements out of your trading account.
If you set something up or buy something that trades a very specific pattern with proper stop losses and take profit targets, there's no reason why a system can't be successful because essentially you are doing exactly the same thing as a manual trade, only that it's far more accurate in terms of execution and money management.