stability in stressful situations, which are common in the process
of trading. Theoretical knowledge can be acquired by reading professional
literature; practical skills and experience are acquired in the
process of actual trading. The most difficult process is adjusting psychological
stress, because in real life it is impossible to completely eliminate
the stress factor influencing human activity. Underestimating the
stress factor could play a mean trick on traders and even completely
block their abilities to make reasonable decisions in real trading situations.
The psychological stress of those trading in the FOREX (and any
other) market is extremely high. Traders must work under permanent
psychological pressure, making decisions in highly unpredictable and
uncertain market situations.
Each trader goes through mistakes, failures, and losses in his or her
own way, in accordance with his or her personality and temper. Some
might blame their failures on the market’s “wrong behavior,” which didn’t
comply with the trader’s brilliant forecast and caused the failure of the
magnificently planned speculative combination. Others blame themselves
and their own inabilities to make right decisions in situations, which afterwards
seem to be simple. It is an interesting fact that, in hindsight, traders
usually find the decision that should have been made at the lost critical
moment and can reasonably prove their point of view. Why can they find
the right decision so easily and quickly in hindsight? Was the trader unable
to do so at the right moment? I don’t think it can be simply explained
by looking at yesterday’s situation from today’s point of view. I do not
think it can be explained by the fact that classical technical analysis allows
for multiple explanations of almost any market situation. It is always
possible to find an appropriate basic explanation for any market shift after
the event takes place. In the heat of the moment, however, the trader was
influenced by stress, and that stress caused the error. This is proven by
the fact that most novice traders show exceptionally good (and even phenomenal)
results trading dummy accounts but can’t even come near those
results when trading with real money.
Being permanently under stress, a trader can often make insufficiently
considered, impulsive, and, therefore, wrong decisions that result
in losses or premature liquidation of profitable positions, that is, in lost
profit. Sometimes, after a few successive failures with various trades,
traders becomes fearful of the market. They are in a state of psychological
stupor, and even a simple market situation may cause panic. They cannot
overcome their emotions or soberly evaluate the current situation, and
they are unable to make any decision—reasonable or otherwise. In many
cases when the market situation shifts against the trader’s position, they
can only passively watch the growth of their losses, because they are unable
to make any decision at all. Often, after the market stabilizes and
traders have the opportunity to calmly analyze daily diagrams of currency
fluctuations, they come to the conclusion that the main cause of failure
was not the lack of knowledge or training but their own emotions. However,
the situation cannot be reversed. Time has passed, money has been
lost, and everything should be begun again.
Another problem that causes severe and even catastrophic consequences
is the trader’s wishful thinking. In this case, traders are sure that
their forecast of market trends is solely correct. They feel the market cannot
and should not give any surprises. They do not consider other options
that could be helpful or they think of other options in a vague and uncertain
form. Sometimes, traders consider a market shift against their position
as short-term and temporary. They begin to average their positions.
They acquire new contracts at a lower price in the hope that the market
situation will come back, and all the positions will become highly profitable.
Afterwards, as the situation worsens, they will be able to come out
of the market without serious losses. Being sure they are right, traders
lose the ability to critically evaluate the condition of the market and accordingly
their own position in the market. In this case, they consider only
those basic and technical features that justify their wishful thinking, and
they discard the contradicting features. This wishful thinking costs them
dearly and can lead to psychological frustration. The market’s “wrong behavior”
not only deprives traders of a certain amount of money and often
ruins their trading account, but also undermines their self-esteem and
their hopes of being a winner in the trading battle.
After such a loss, traders blame themselves, repeatedly going through
the details of the unsuccessful trade. They blame the market for the
“wrong behavior” or themselves for errors in what then seems an absolutely
clear situation. Sometimes, the trader-market relationship takes
the form of a vendetta. Traders consider the market as their personal enemy,
treat it in an unfriendly way (even with hate) and dream of immediate
revenge. Doing so, they miss the fact that they are essentially blaming nature
for changing sunny weather to rain. It is very important to be prepared
beforehand for this change. Trades should always have close at hand one
or a few options in case of sudden change of the situation/weather, so that
their foresight assures their good time or good profit.
The third main psychological problem is trader uncertainty, especially
when traders are inexperienced in abilities and skills—specifically about
each market position they hold. Immediately after each position is opened
and a money contract is bought, traders start questioning their choices.
This is revealed most vividly in the case of a moderately active market at
the moment of fluctuations close to the opening price of the position. Any
movement (even insignificant) against their position causes traders to
have an irresistible desire to sell the recently acquired contract to limit
losses, until it is too late and the market does not shift too far away from
their position opening price. On the other hand, an insignificant market
shift in the desirable direction causes the same desire to eliminate the position,
until it provides for any (even tiny) profit and before this profit
does not turn into losses.
Scared and troubled traders rush and race about. They open and liquidate
their positions too often, and experience many small losses and
gains. Within a short period of time, they turn intermittently into bulls or
bears. As a result, they suffer losses on a dealer’s spread and/or commissions
when there were no significant market changes, and all the market
fluctuations were no more than just regular market “noise.” Such losses
are typical for beginners and individual traders with small investment capital
or little experience and insufficient psychological preparation.
Not uncommon are cases of traders’ impulsive decisions on trading,
without any plans or serious preliminary market analysis. The position is
opened under an impulsive, invalid emotional reaction. Often, it can be
explained by traders’ fears of losing a brilliant opportunity to earn money
they think is being offered by the market at that moment. I have witnessed
these attempts to jump onto the last carriage of a departing train, and
such attempts have ruined a lot of traders. Many traders cannot calmly
watch any kind of market movements. Some of my students have confirmed
this reality. If they have no positions at the moment of more or less
significant market movement, they consider it as a lost opportunity to gain
profit. This can inflict a serious shock to them.
Complete Reading : Psychological Challenges of Speculative Trading
