What is so difficult
In this chapter we will describe the general psychological problems with which a trader has to face. To a significant degree exactly the beginners encounter these problems because experienced traders find a possibility that or this way to adjust to or to overcome his psychology. The reason of losses of the beginners to a great extent depends on psychology.
Let us list the main "enemies" of a successful trader ("the enemies" that are hidden in a trader himsel):
- Lack of discipline;
- Strive to make the biggest profit possible (greed);
- Strive to receive profit as soon as possible or to recoup immediately if there were any losses (excess trading);
- Overestimation of one's strength;
- Uncertainty in one's strength (or one's strategy);
- Fate in authorities;
- Hope for the favorable outcome of market situation;
- Fear of repeating the same unfavorable situation (appears to that or this degree after the first precedent).
It is not the whole list of "enemies", but on the example of those given we will try to find out the most typical problems of traders.
Lack of discipline - is a universal problem of every human being. 100% discipline is a myth. If it does not exist for one type of professions, then for other one lack of discipline is ruinous. A trader should be disciplined, and if he is not sure about his abilities, he should work to improve his discipline.
Lack of discipline may manifest itself during the entering and quitting the market, in lack of accounting and trading reports, trading without any system (in the most general sense): in any time of day, with any volume and any financial instrument. The quantity of transitions at time unit is changed in accordance to the state of mind. The decisions about entering, quitting or position leading are taken with the view of spontaneously chosen factors among which can be anything starting with the stage of moon and ending with somatic state of trader's body.
Another manifestation of lack of discipline is the situation when trader does not use saving orders (stop-loss and take-profit), and this can lead to the increase in losses that will be much bigger that trader could except; or the profit that played role of floating earning from transaction will not be fixed at balance, and the price will move to an unfavorable position.
To imagine where such a behavior can lead, think what a monkey can do in an airplane cabin where it is allowed to move all the crowbars, push all the buttons and do everything it wants. The probability of the airplane reaching its goal is equal to zero. And even if a monkey, for example, at any time interval just loses the interest to the crowbars and buttons and starts to eat banana - the result will be the same.
Strive to receive the largest possible profit (greed). This feeling is quiet understandable and very ruinous for the trading. Beginning trader, aspired by the feeling, that he can get an instrument with the help of which he can receive the glut of wealth from the currency rates movements, as a rule, wants as much wealth as possible (and as sooner as possible). This feeling leads to demand violation of the simplest rules of money management. But entering the market with the volume that is too big - is not the only consequence of greed and is not the most ruinous one.
Greed manifests itself in the most disgusting way when trader closes the position too fast in the case when it starts to bring profit. When so-called "floating" profit appears in the transaction, greed pushes trader to fix the result of this transaction in the balance as soon as possible, and this requires the closing of the transaction. This behavior reminds a gardener that seeds a seed and then dig it out every hour to look if the sunflower becomes larger. Besides this behavior contradicts to one of the "golden rules" of the trading: "cut the losses but let the profit flows!"
With the aim to close the transaction as soon as possible when the first profit appears, too close orders like takeprofit are set. Stoploss saving orders in this case are ignored. Trader thinks that he can close most of the transactions with profit. He does not know what to do with negative transactions that have brought significant losses, and in situation when there are too many transactions like this he becomes helpless.
Strive to get the profit as soon as possible or to recoup in case of losses (exceed trading). Greed in one of its manifestations makes trader to make maximum quantity of transactions in a time unit. Taking into consideration that each transaction has some potential for profit, a beginning trader thinks that the more transactions he makes the more profit he will get. He tries to close the smallest profit. The trader pattern of a trader like this looks as follows: some dozens of profitable transactions, and then one or two unprofitable ones, that not only takes all the profit away, but also leads to a deposit loss.
We do not want to discourage a trader to use "pipsing" or "scalping" strategies, however a trader should understand well what prevails in him at each moment of time - strategy or greed. As an element of strategy (if a trader understands the purpose and the risk of a transaction) - short-term and very short-term transactions can be made. However when a trader cannot explain why he closed that or this transaction, the reason of his actions might be greed.
If one of the manifestation of greed is permanent uncontrolled averaging of loss position with the purpose to lead it to the profit position or at least to the break-even point. It also gives rise to exceed quantity of transactions, as well as to too big volume of operations, that are contradict to money management.
Desire to enter the market after losses (the desire to recoup) frequently leads to the result when a trader makes a number of unthinkable emotional actions, that lead usually either to serious loss or to significant drawdown. As a rule the beginners try to recoup using double volume of a transaction after losses. The result of this frequently is when a newly opened position leads to even bigger losses, and after several of deposit iterations nothing leaves.
Here it always has to be noted that there are strategies that need immediate enter after close of previous position. For example, so called "turnover close" (a situation when a newly opened counter transaction closes the existing one and at the same time opens the position in opposite direction). It does not mean that this strategy is bad. It has to be sharp division between entering the market in out-of-balance condition and the desire to recoup (that is unrecompensed) and calm work in accordance to a clear strategy that visually may seem the same.
Overestimating of one's strength is frequently happens with the beginning traders in two cases.
Firstly, it is a period when a trader has just started its work at Forex. As a rule, inspired with advertisements and two smart books (usually instead of books there are short articles), a trader comes to a conclusion that he has found "The Holy Grail", that his time has come, and that from this moment all his financial difficulties are fully solved. The first successes with demo-account leads to even more overestimation of trader's strength. It has to be remembered that the work with demo-account is practically free from the psychological factors influence and is not equal to the work with real trade account.
At this time period (because of a very small experience) a trader does not know all the bitterness of defeat and does not know what are the significant losses. This even more stimulates self-confidence.
The second wave comes after the first losses when a trader has got significant experience and could hold on for some time, supporting permanent relatively stable deposit growth. Sometimes traders, that on the one hand are not beginners anymore, and on the other are not professionals come to a conclusion that they "see the market", they merge in it (in emotional sense) or get other mysterious abilities.
Overestimation of one's strength leads, as a rule, to a more aggressive trading than it has to be. In particular, too big volumes are used while entering the market. The secure stop-orders are ignored (a trader is sure that he will not make a mistake and/or always will be able to close a transaction at the market price). The recommendations about means diversifications are also ignored.
Uncertainty in one's strength (or in one's strategy) has equally ruinous effect on the results of the trading, as well as overestimation. The uncertainty appears, as a rule, after 3-5 first serious losses (the loss of deposit or fixation of a big range of unprofitable transactions). Also uncertainty may appear in case, if trader has worked out a strategy that should react on certain market conditions, but there are no such conditions and there are no such an opportunity to lead a trade or a trade brings losses. The additional factors of uncertainty can be the opinion of other participants of the market, especially when they differ from trader's ones. It concerns the beginners to a great extent because they have no experience and can depend on authorities opinion. (see below).
The most typical manifestation of uncertainty is a strive to avoid trading, i.e. do not enter the market as long as possible. Even appearance of favorable circumstances (from the point of view of side watcher, uninterested in trading of this trader and without any negative psychological factors), unconfident trader will find an "excuse" to avoid entering the market. The result of this is stress, connected to unprofitability and capital "downtime".
The other manifestation of uncertainty is the desire to leave the position soon after entering the market (to close the transactions with losses "to avoid even more losses" or with small profit "to avoid it turning to losses"). This behavior should not be confused with greed: although all external features are the same, but the motives of a trader behavior in this case differ sharply from those described.
Frequently some time is needed to fight the uncertainty. The results of statistic data of the trade strategy behavior, based on history as well as statement analysis, can make a big difference. In case when a trader has a possibility to make sure that his strategy was profitable in history, it increases his confidence in his strength.
Fate in authorities manifests itself in an unconfident trader. Howevere even a self-confident beginning trader can have this psychological problem. Different glorified Forex "guru" influence greatly on traders. Frequently such people make money on selling of their "signals", "recommendations" and "forecasts".
Common sense can save a beginner of this problem. The following questions have to be examined: "If this specialist is really good enough, why he does not make money on trading itself, and sells his advice instead?" or at least "Does this specialist follow his own advice?"
Fate in authorities can manifest itself when a trader works using "detonating mixture" of his own assumptions and the opinion of free number of "authorities", given in different sources (sometimes with falsifications). In this situation it is very difficult to find difference between the thing that really matters and the thing that does not matter at all. Also the opinions of two different authorities may differ one from another, and may be absolutely opposite.
There is only one answer to this: self-education and independent decision making. You should not confuse fate in authorities (that can be regarded as negative psychological factor) and normal, clever and rational strive of a trader to meet with the calendar of events for the coming week. The forecasted data that is noted in the calendar of high quality is made by experienced groups of analytics and deserves attention. However it should not be regarded as a doctrine, you should not take into consideration only one possible variant.
Hope is a favorable end of the situation at the market. The hope is tied closely to the fear of losses. A real loss for a beginning trader is at least a disputable question. In the beginning of his career a trader thinks that he will make only profitable transaction (or, at least, he will make insignificant number of losses). Hope manifests itself when a trader does not fix unprofitable transactions, reckoning on in some time the market will change its direction in the more favorable course, and it will be possible to close the transaction with the profit. Of course all stop-losses are ignored. A hoping trader does not plan to close the transaction with losses.
A hope is a bad adviser for a trade. A trader must track and analyze the market situation and react on it very flexible. If trader thinks that the situation is favorable at the moment of the entering the market, for example, for buying transaction, this situation can change sharply in a few minutes. A trader should agree without any inner resistance with this situation and fix the losses when they do not exceed the level of normal risks. This behavior is described as the mistakable one in some sources, however we are against the opinion that the loss is a mistake. The loss is a realization of one of two probable and equal outcomes of each transaction.
The exceptions are the cases when a trader enters the market against his own rules. The instrument, volume or direction of a transaction has been chosen incorrectly. A trader does not want to make this transaction but for some reason he makes it. This is a real mistake. And it should be accepted as soon as possible, and the loss should be fixed.
Fear of repetition of unfavorable situation.
In general, it is ultimate manifestation of uncertainty in one's strength (see above). Fear takes place when the losses are too large, or if they have appeared in situation when a trader did not expect them or was not ready. Loss of activity comes as a result of this fear, and it follows by long-term negative consequences, that will manifest themselves in decrease of self-confidence for a long time.
It is not possible to warn the appearance of fear. As well as it is impossible to guarantee that a trader will not have significant losses. Nevertheless a trader can get ready to the fact that the losses are part of the job. The full loss of deposit is possible, and this should be taken into consideration. It can happen with anyone. You have to understand, that market trading - is a high-risk activity. That is why a trader should work with the relevant volume of capital, that can be lost without damage to him or his family.
Let us also describe the problems that are connected with the work of a trader on means, that came either from investors or by credit. Attracted funds cause more "difficult" problems than one's own ones. It especially concerns credits or percents, and sometimes it spreads on the cases when funds came from investors. The larger sum he gets, the more difficult it may be for a trader. The only thing can save the situation: a trader should forget about the source of funds and think only about its management in accordance with his strategy. The LiteForex PAMM service is very appropriate in this case.