5 Keys of Psychology in Foreign Exchange

Axel Private Markets 5 Keys Of Psychology in Foreign Exchange

At Axel Private Markets Ltd., we work closely with hundreds of professional traders across the globe with a full array of techniques. When we ask them what is the difference between a successful and a failing trader, psychology is emphasized time and time again. It is raised in the discussion far more than skill itself. This may be because whereas skill is bankable, psychology is always fragile, but ultimately there is no doubt that it is psychology that marks the difference between sustained and steady progress and failure in a great many instances.

Having spoken to outstanding traders in preparation for this article, Axel Private Markets have identified and taken the time to distil into 5 points the key aspects that you should keep at the front of your mind when you are trading.

1)      Stability is king – Stability is perhaps an umbrella term but it does as good a job as any at encapsulating the ideal when it comes to trading. Foreign exchange markets are by their nature, to an extent, unstable. They go up and down in ways that no one can fully predict and are prone to swings under the influence of international news and events. Stability means not overreacting, and in many cases reacting as little as possible.

Stability will come with experience, but may take time as it involves integrating many other aspects of performance into your trading activity. If you have doubts about your own stability, we would like to encourage you to open a demo account with our Metatrader 4 trading platform and applying its tools to your own practices to hone your ability before you go live with real funds. A good indication of when you have sufficient stability is when you can deliver sustained profits.

2)      Emotional control – Emotional control is one aspect of stability. It protects against overcorrection and irrational decision making, which are the opposite of what you need when you pursue a strategy that has to be based on measured responsiveness and technical analysis. Emotional control is particularly important in more volatile markets – it will be a bigger priority in coin trading than it will be in major indices.

There are all sorts of ways to develop your emotional control; some people preach the importance of physical health; others rely on deep experience. Whereas many of these do not hurt, and you can never have enough of them, in our discussions we find that having a disciplined framework of how you intend to trade is the most effective means of controlling you emotions. This does mean you should have a plan, but also have structure regarding how much you trade and when, so as to limit the amount of variables that could influence you and ergo your decision making process.

3)      Discipline – Discipline in foreign exchange tends to mean sticking to the plan. Divergence from plans is occasionally appropriate, but occasionally is the active word here. Plans also need not be justtrading strategies, they could be schedules as to what you are going to trade and when, times of the day, conditions etc. If we are not disciplined in ourselves then we are not putting discipline onto the market which is the most reliable way to produce sustained returns.

Discipline is best gained through its practice. Many traders advocate a disciplined lifestyle so that a trader becomes very used to doing what they planned to do by default, rather than conditioned to be overly responsive to the demands around them. It is worth noting that discipline only helps us to reinforce whatever qualities we are bringing forward with our strategies, so it is wise to be careful how we apply it – for example, you will not want to move skills from your forex trading over to World Major Indexes without being completely sure that the principles translate. Similarly, you are not applying discipline responsibly if your plan is leaves you exposed to excessive volatility with a single commodity when you could have diversified a portfolio by, for example, integrating European Stocks, indices and futures. Take care in what you do and how you go about it.

4)      Adaptability – Just as Yin and Yang are opposites but both are needed, so too do you need adaptability. This is most key in assessing reasonably what is not working, what was unwise, what could be improved and why and then applying the necessary changes. Whereas it appears on the surface of things that the notion of adaptability undermines other aspects of psychology outlined here, the natural tension is healthy and it is for the sophisticated trader to measure when to be adaptable and when to stand firm.

Be your own leader: keep in the front of your mind at all times whether you are being adaptable or whether you are overreacting and you should be well insulated from impulsivity, erratic trading and overcorrection. Remember that all forex, indices, futures and commodities all being priced live with an infinite number of theoretical possibilities influencing the price, we cant ever understand these all perfectly, can be can adjust to their effect.

5)      Self-Awareness – The more you read on psychology in the foreign exchange market the more that you will take on the importance of self-awareness by osmosis. The key here is to recognize when you are starting to behave outside your regular, intended frame. Self-awareness need not only come from your intuition. You can assess your recent performance and, within reason, compare it with your other performance.  Take the time to ask real questions of yourself as to why things are different and why they are the same at certain points.

Consider at all times how you are reacting as well as the markets as we are all sensitive to external stimulus and your buying and selling should not deviate too far from a profitable plan.