The psychology of a trader

Statement: I recently downloaded the Terminal, opened a demo account and have already made several profitable trades! Playing the market is easy!

Reality: this is what just about every new client of a brokerage firm thinks. Demo account trading is especially popular. As a rule, the majority of transactions conducted in demo accounts are profitable, especially if the virtual sum of money in your account is far greater than that which you are really willing to put in the account. It turns out that, to some extent, you are your own worst enemy here. And if we’re talking about a real account, then the problem is compounded by the fact that your psychology can play a cruel joke on you, especially if you underestimate its importance and relate to it as just chatter. This is the difference between a successful trader and one that is always facing losses – the successful trader takes everything into account and knows that he, above all, is the source of all his victories, as well as defeats. All your flaws, weaknesses, fears, complexes, your worst and best qualities will all surface here. In other words, the basic laws of life are applicable here too. The worn-out phrase "beginners luck" takes on special importance here - we already mentioned that most of them do quite well with their demo accounts, opening 10-15 small transactions. We will reveal to you the secret of what happens next. It’s like they just got their driver’s licenses last month and think they’re invincible - ready to put the kiddie games aside and get serious. They start a transaction using their real account, even if only for a small amount, but the price doesn’t move in the direction they planned. "Nothing to worry about” thinks the trader. I only traded 0.1 of a lot, my deposit can survive that, and the price will surely go back to where I thought it would be.” We forgot to mention that these traders typically don’t set a stop loss, only a take profit, in hopes that their streak of profitable trades will continue. So, they close their Terminals and the next time they open them they see that the deal actually closed! Only, why is there only 10 cents in their account? This is called a "drained deposit." So it's best not to succumb to the euphoria of trading, and while waiting for that "fateful deal" read a book by a trading guru try to see things through their eyes, because looking at the stock market from their point of view is very useful and can eliminate many errors. Moreover, popular books on trading are popular because the ideas and methods they put forth have helped a large number of traders.

Statement: The market turned against me! Should I close the deal? Set a stop loss?

Reality: wait, don’t panic. If you still believe that the market will turn around, make sure you understand what is happening and why, analyze the factors that confirm your reasoning. At this point, you have three options. Your choice depends on whether you are a novice or a professional, if your strategy is already proven or new, if you trust yourself or not, and whether or not you are prepared to wait. All of these options are viable and nobody can say if they are right or not. However, for novices that only recently began trading and rushed into a “quick deal,” it’s probably best to close the deal if they suffer losses of more than 10 points. They are better off sitting this one out, do some more analyzing and try to enter the market again with a fresh perspective. The second option is most often chosen by those traders who have been trading for a long time, have a proven strategy, a plan, wait for right time to enter the market and are confident in their actions, even if the price is moving (not very hard, of course) against them. They call it "giving the market time to breathe." But in such circumstances it’s very dangerous to leave the Terminal unattended. You might be left without a deposit. We don’t recommend that you trade like that quite yet. The third option is that you simply place your stop loss at the level to which you are prepared to suffer losses and make a promise to yourself not to move it. Then you can close the Terminal and not have to sit and monitor the bidding process. It’s best not to set your stop loss on a "psychological level" like 1.2500 or 1.2555, for example. The price will more often than not reach this level, hit the stop, then turn around and go in the opposite direction. So, set it just a little further.

Statement: I do not want to open a real account! I'm afraid of losing all my money!

Reality: Then it’s definitely not worth opening a real account! You're not ready for it. And for those who are ready, we say the following: First, a real account is not something terrible that will swallow up your money and never return it. It's just a place where you can put money when you see a confident, beautiful price movement. Then you can join in and make some good money. No one said that you need to trade continuously, every day and every hour. Only beginning traders try to stay in the market all the time. If you are not a day-trader with a stable trading system, a clear plan and clear signals that indicate the opening, it is better to wait and do nothing.

Fear is a natural state – don’t be afraid of it (forgive the pun). Try at first to operate according to the following rules. Perhaps someday they will really come in handy:

1. Select several technical indicators that you understand the best and for which you have the clearest understanding of the right time to open a deal to buy or sell. Write down the points at which you would have opened and then watch to see whether or not you would have made money in that case.

2. Keep tracking the calendar events and try to enter the market only after you clearly see what the market’s reaction is to the published data. If you open a transaction based upon expectations, you may miss the time of publication of the actual data and get hit with a huge loss.

3. Open transactions only with the trend. If the price goes up – buy, when it goes down - sell. But don't forget about the support and resistance lines one way or the other. They do actually work and if the chart breaks through one of them the movement will continue with very high probability. As a rule, the daily trend is best seen in the H1 and M30 views. It’s quite dangerous to open trades against the trend that develops over the course of the day. Smaller intervals, like the M1 and M15 views are designed for micro-transactions lasting just five minutes. Be sure to keep this in mind. What you think is a trend on the 15-minute chart, may be only a slight correction in the basic movement shown in the H1 view.

4. Don’t open transactions for more than one lot.

5. Open the transaction only if you are confident that the price will go in the direction you want. Initially, it’s best to set a take profit of approximately 15-20 points and a stop loss of 10 points. If you open a deal and the price suddenly goes against "your" direction - don't wait! Close the deal immediately, albeit with a slight loss. This just means that you were wrong. It’s better to watch the market closely and enter it again when the movement becomes more pronounced.

6. Don't be afraid of small losses! Feel free to close the deal if things don’t move in the chosen direction. Don't expect that the price will bounce right back. It may not return for another year.

7. Don't worry about lost opportunities to earn. The market is not going anywhere until there is no more money in the world. So you will still have around several hundred billion of these "opportunities" to open a trade.

8. The market will not “drain" your account - only you can do that. To be more precise, it can turn fear, greed and excitement into your worst enemies. Afraid of losing? Close the deal. Want to earn more? Better to make a few small profitable trades today, tomorrow and the day after tomorrow, than one large unprofitable one today. The temptation is to do everything right now. That just isn’t possible. But losing everything in an instant is sometimes. So be greedy – don’t give away your money to the market and don’t allow yourself to go to deep into the red.

9. Use your head and your deposit will multiply. Leave emotions for the big party you are going to throw in honor of your first million earned in the Forex market. For now, just keep working on it.

10. Treat trading with your real account like a business and the opening of each transaction, like a math problem. Solve it correctly and you receive a monetary award, incorrectly and you pay a fine, the size of which depends only on your decisiveness in closing an unprofitable position.

11. Make a plan for yourself – a trading system. Here's a simple example: you decide that you are going to open a buy trade when the price reaches the support line. Or, say, only if it succeeds in surpassing the resistance by 5 points. Have you defined your plan? Now watch and wait for that signal. When the signal come - open it. Another option: you have set a goal for yourself this week to earn, say, $200 (keep your head out of the clouds!). So, if you earn $100 Monday, $50 Tuesday and $60 Wednesday, then you’ve done well this week. You have exceeded your goal and no longer need to trade for the rest of the week. Another example: you have set a goal for yourself to earn $300 in one day and you will only allow yourself to open three transactions. So, if on Monday, you have already entered the market three times, but have only managed to earn $150 – then stop. No more trading today. Stick to your plan. The number of deals takes priority. Actually, without this a pivot point, it is very easy to get lost and enter into transactions that you will later regret.

12. Try, especially at first, not to leave transactions open without supervision. And certainly never do this if you didn't set a stop loss.

Statement: I cannot figure out how to analyze the behavior of prices!

Reality: don't worry, you're not alone! In fact, the market doesn’t lend to analysis and lives its own life. It doesn’t care one bit that we struggle to understand it by breaking it down into lines, waves and other things. The market is like a child whose parents think they thought of everything, raised their child well, and then one day he runs away from home to become a rock musician. Because that’s what the child wants and that is what his current life (read - market) situation demands. And the parents (traders) can’t do anything about it, except say: "but, we did everything scientifically.” But, don't worry. Like everything in our lives, the market is subject to certain laws and things don’t happen for no reason that often. Just as a child may be influenced by friends or their favorite band, the market may behave the way it does due to politics or the changing needs of the traders in "the pit." Thus, your task is to open a deal only when first, the movement of the market is clear to you, second, your analysis is reinforced by the technical indicators, and third, your strategy has little chance of being overshadowed by some fundamental event over the course of the next hour. And finally, your task is not to panic. Be cool and remember that there will still be many more opportunities to earn.

Another important point: do not forget that people work on the market. Among them are those who trade on it and those who actually create the market (market-makers, brokers, dealers, etc). You see, the market is not candlesticks and levels of support – its people screaming "buy" and "sell" in an exchange pit and those who execute their orders. Internet trading is secondary. It provides a graphical representation of what is actually happening at the exchanges and how prices can be influenced by those sitting at the terminals. In comparison, it’s like a map of the sky and a real galaxy. Based on this understanding of the market, you will be able to achieve more than if all you do is look at lines and charts in your Terminal.

Statement: everybody loses money on the market! It’s a scam!

Reality: this is a very common allegation which has nothing to do with reality. To begin with, this is how the market works: say you pour $1000 into the ocean – somewhere on the other side of the ocean somebody is $1000 richer. So the assertion that "everybody loses money" is fundamentally wrong and those who believe it have most likely not read this course. And to the point that it’s a scam, we can only say that this type of statement is akin to saying that only thieves make millions in this world, only crooks rise to power, only crazy people make scientific discoveries, A’s are only given in school to the teachers' pets, and that all secretaries sleep with their bosses. Don’t try to blame others for your own failures. You would be much better served to learn the rules people follow to make money on the market.

Statement: I closed a deal on my take profit! I earned money!

Reality: Congratulations! If you are a newbie, not a seasoned day-trader or scalper, who makes a lot of small transactions for one or two points at a time, don’t trade anymore today. For example, you can make a rule: one profitable deal per day. As you start to feel more comfortable and gain additional experience, you will start to be able to “feel” the market, develop your own trading system, and read books written by experienced traders. Once you feel more confident, then you can act according to your plan. But for now, your emotions may play cruel games with you.

Statement: I can't do it! I always end up with losses!

Reality: now we’re really getting into psychology. Relax and don't panic. Instead, the best thing to do is practice – that’s why you have a demo account. Monitor the market carefully and don’t rush yourself. Understand first what you are doing, why you are opening a transaction, what signals led you to this decision. Be sure to evaluate the situation in various time-frames. Oh, and do some reading, preferably with books, not the internet.

Statement: I have been chatting in the forums and they say…

Reality: whatever you read in forums is based on someone else's experience - this is definitely a good thing. It is also helpful to ask others for an explanation if something is unclear. But to completely rely on other people's opinions, tips and even trading advice is not always beneficial. The people who write things in the forums are just people, they lose sometimes and earn sometimes, just like you. The only thing that helps them sell more profitably than you is an experience. It’s not so much that their trading system works perfectly, but what matters is that they know how to use it. But alas, they can’t really explain it to you. Just like you can’t describe to someone how to speak Chinese. You can only learn a new language through diligent personal study and lots of practice. That is exactly what we hope you will do! Believe me, people make money on the Forex market, otherwise it would have quickly ceased to be of interest to anyone.

Statement: You can’t teach someone how to trade on the market! I don't need any training materials or books!

Reality: you're right. It’s pretty hard to teach someone to trade on the market. It’s just like many other things in life that you can only learn by doing them yourself. Nevertheless, knowing the rules and laws of the stock market is very important, otherwise you run the risk of making a lot of errors which could have been easily avoided if you had read the training materials. We encourage you to read books also. These traders do not give advice, they share their experiences, show specific examples and give you kind of knowledge that will be useful to you in your successful trading!

Get back