When we take a deeper look at the Forex market, we will find it’s main driver is the “Trading Psychology of Market participants”.
Trading psychology or market psychology is a derivative of human emotions. All market participants are driven by either fear, greed, dreams, and ego. Human nature tends to follow the crowd and we seem to react in the same way when contracted in certain situations. Human behavioral patterns are re-occurring in all aspects of life and is likewise with trading psychological behaviors.
It all, honestly doesn’t matter if you are a small time retail trader or running a multi-billion dollar hedge fund your trading psychology or mindset will be the driver of how you place trades and determine your profitability.
Forex psychology is not purely constraint to your emotions. Mindset, risk appetite, risk management/money management, trading plans, business plans, and even why you trade are all contributing factors of trading psychology.
Its human nature to always look for ways to increase wealth, this comes from the raw animalistic instinct of survival. This instinct of survival is driven by fear itsself. The fear of “have not” or the “lack of”. This drives us human beings for better more secure ways of living. The reason why we go the school study hard at uni is for a higher paying job and more opportunity to create wealth. We seek wealth creation out of the primal e-motion of fear. This brings us to the fear of not having enough money which then creates the fear of loosing money
We as traders risk the money we have, to gain more money. So as traders we have to concur with the fact that we are driven by fear with fear.
With risk comes reward. This is likewise with “any” business or job. We all have a certain degree of risk no matter what we do in life and we all have a different ability to control risk and/or depending on our risk appetite. Risking to much while trading could lead to or be labeled as gambling.
One component that drives the speculative Forex market is greed. Is greed good? Sometimes yes, it can drive us to exceed our goals and a little bit may be good. But, it can often cloud our judgment. Greed can lead us into being over confident and feeling invincible. Have any of you ever had that feeling of being over confident to then come crashing down when its all lost? Then passing the blame game and calling forex a scam?
Ego is the driving force behind all our desires it makes us want more and more, and drive us to be on top of the next guy. Human kinds biggest enemy is ego and can often lead us into self destruction or worse the destruction of others. Ego plays a big part in trading psychology and is a big driver of the forex market.
We all have dream of sitting on a beach with a laptop being a million dollar Forex trader but so few will ever get there. Alot of new comers come in every year thinking they’re all that, and believe they will make a million by funding $1000 into an account.
The forex markets are filled with all sorts of dreams.
The problem is most traders are way under funded in comparison to their goal or targets.
All market participants are driven by fear, greed, hope and ego. They all tend to react the same way each time they encounter the same situation.
New participants are surprising ignorant of the way markets have acted in the past. The same mistakes are repeated by each generation of market participants. Even the experienced market participants will tend to repeat their past mistakes over and over. These mistakes are soley caused by their fear, greed, hope or their ego.
All markets are, is simply crowds of people watching prices, interacting with each other and based of their trading decisions. Some are buyers, others sellers., and all have psychological predispositions that influence their decisions.
Technical analysts can take advantage of exploiting trends and patterns well into the future needing not to have any impact of trading psychology affecting their trading decisions. Trading becomes purely reliant on reading the charts.
The tendency for people to ‘follow the herd’ is another factor that technical analysts can take advantage of . The technical analyst has a sound understanding of human nature and psychology. Extreme price volatility, for example, is frequently the result of the impulsiveness, unpredictability and lack of rationality of a crowd.
With technical analysis we disregard all other aspects and only follow routine, machine like actions and being apathetic.
The market psychology can go on about its way how ever it likes but, it wont affect the trading psychology of the individual trader using technical analysis principals and techniques.
Trade Safe! 🙂