The psychology involved in Forex Trading
The 3 Ms of trading is a phenomenon often referred to when discussing trading; mind, method and money-management have become the accepted terms by which we define the disciplines involved in trading. Method is generally defined as the trading strategy we’ve created; the currency pairs we trade, the time frames, the analysis underpinning our decisions etc.
Money management concerns the risk we assume on each trade we take and perhaps the overall drawdown level and risk we’re prepared to accept as part of our trading plan.
Mind, often referred to as the psychology involved in trading, is often dismissed as the least important of the 3 Ms. However, many authors of trading material would argue that our trading mind should rank higher than method and money-management. The contention is that until we get control of the various mind issues which can irreparably harm our trading potential, then the other 2 Ms are rendered irrelevant. How true this claim is, forms the basis of this discussion.
How do we reference psychology, when we’re applying the term and concept to trading? Perhaps the most relevant meaning is quite simply versions of a phrase we often hear; “getting our mind in the right place”. We use this type of phrase in many aspects of our lives and there are times when settling our minds is essential.
Organising all our thoughts, in order to ensure we’re in the right place psychologically to trade forex from home or a small office environment, can represent a similar challenge to public speaking. Whilst it might not involve the same sweat inducing stress, the stresses we undergo whilst trading, which are particularly heightened when we’re novice traders, can often feel overwhelming. But there are many simple exercises we can adopt, as part of our overall trading plan, which can drastically help to settle our minds, before our trading session and trading day begins.
In this short article we can’t possibly cover all the exercises which may settle your trading mind, therefore we’ll concentrate on one key aspect that’ll help ensure you can develop a calmness and readiness for the trading challenges; preparation and routine.
“Fail to prepare and prepare to fail”, is a phrase we often use in trading and preparation is an undervalued concept. Having a check list and routinely and methodically ensuring the list is adhered to can centre us, calm us, focus us and determine us to ensure we’re in the best possible frame of mind to trade.
Ensure you’re aware of the key fundamental economic calendar events that will be published on the day. Ensure you’re aware of any breaking news, or news that broke overnight. Check for any unusual currency movements on the usual approx. 28 currency pairs that most traders would consider trading, in that way you may discover some developing correlations. Check your account balance, check your open positions, check your news feeds. Why not even check your broadband service for upload and download speeds? There’s more checks we can suggest, but you get the general idea. In this way we’re beginning to focus ourselves on the challenge ahead.
Perhaps as we’re practising our routine of checks we’re indulging in a form of mediation; we may begin to unconsciously perform a mental scan of our wellbeing. How are we feeling, how’s our breathing, how’s our current levels of trading optimism, what’s our aim for today, this week, this year, what’s our goal?
Our intention in this article is to bring your attention to the subject of psychology were trading is concerned. Given that there are several recommended novels published by highly respected traders on the subject, we can only skim the surface in circa 800 words. It’s a fascinating phenomenon, that is worth exploration during your quieter trading periods.
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