The forex market is an exciting and enticing one; however it is riddled with psychological pitfalls. The high-paced environment causes for a highly stressful setting which can lead to chronic stress and anxiety disorders. This is not always the cause, but many traders do find themselves in this situation without coping strategies. This article will identify and examine the three common psychological pitfalls traders experience without even realising it. This unconscious presentation is what makes them so dangerous.
Forex Rates and Mob Mentality
The forex trading arena is often about following a trend or following the crowd. This mass movement can be likened to ‘mob mentality’ or ‘social contagion’ and is a negative behaviour regarding trading. When one blinding follows a group, behaviour based on incorrect information will take place. This biased behaviour will more than often lead to mistakes and damaging losses.
Although joining forums and entering forex rates discussions is an important aspect to becoming a successful trader, it is not a strong means of gaining forex rates trading information. One should use these sites for training purposes solely and not as a basis for your trading. Rather conduct your own analysis and take tips as hearsay. Never consider them as indicators or signals to trade. By confirming the data source and verifying it as legitimate you will base your forex rates trades on an informed decision ensuring the potential profitable outcome.
Trading with the Confirmation Bias
Many traders wish to validate their information or analysis; however it is important to look for contradictory data as much as complementary. While confirming your data as reliable, the chances of a profitable trade are more likely if one has noted both sides of the coin. The only method to overcoming this mental mistake is by training oneself to look for conflicting information when doing your data research and technical analysis.
A further difficulty with the confirmation bias is that traders will review only the parts of analysis they wish to see. Many traders, beginners and experienced, will look for points in the analysis which confirm their thoughts exclusively. This mistake can be overcome by training oneself to read and accept all information in the analysis.
Having too Much Confidence in Your Trading
When trading, it is always important to be confident in your strategy and trading style. If you are a trader who is constantly second-guessing yourself there is a greater chance you will incur damaging losses. Of course, one must not overstep this confidence boundary for it could lead to overconfidence which is another difficulty leading to emotional trading. While this may result in a succession of positive trades, as the trader will believe they are invincible and take short cuts when conducting analysis. This will often led to damaging trades and a psychological anxiety attack.
There are various mistakes one many make when trading forex, many of them dealing with ones psychological state. In order to avoid these difficulties it is always important to conduct your own market analysis and accept the information you are working with. However, it is also important not to become overconfident if you are making profitable trades for this can have more detrimental effects than experiencing losses.