The Real Reason Forex Traders Lose Money – Think and Act Like a Pro
Special note: This is one of the most important articles you are going to read here at Forex School Online. It is my hope that after reading this article you will be able to think about your trading differently and change your trading mindset for the better.
After reading this article I would love to hear about your experiences and thoughts on trading psychology in the comments section at the bottom.
Why Do Forex Traders Fail?
A quick glance in any Forex trading forum will show you that they are full of threads containing trading systems and trading signals. Ninety nine out of one hundred threads in these forums are traders either posting about or looking for the Holy Grail trading system. The reason for this is quite simple; many traders believe that the only reason they are not making consistent profits in the market is because they are using the wrong trading system.
The truth is that most traders that are consistently losing could take any profitable system and still not make money with it. It is also true that the profitable trader could take most profitable systems or trading methods and make money.
How is it that two traders can take exactly the same system, using exactly the same tools and yet one trader can make money and the other may lose? How can two traders using exactly the same method to enter and manage trades have vastly different results?
The truth is that making consistent profits in the Forex market all comes back to possessing a mindset that allows the trader to make consistently good decisions time after time, day after day. Two reasons this is not easy are:
- Traders don’t realise what they are doing wrong
- Finding out and working on the problems is not as exciting as looking for that next super system that will make millions overnight
Traders Don't Know What They Are Doing Wrong
In most cases traders don’t realise what the problem is. Most losing traders fall into the trap of thinking that the reason they are not making money is because of the system they are using to enter trades. This is a perfectly rational thought, but it is also the thought that will hold them in the pattern of losing money.
The truth is that no matter what system a trader uses, if they don’t possess the correct mindset for trading they will lose money over the long-term. The mindset that the trader holds will determine what their trading results will look like over the long-term. Whilst anyone can make a few winning trades in a row, only a trader with the right mindset can handle both the wins and losses and make a profit consistently in the long-term.
How to Know When it is Your Mindset and Not the System That is Holding You Back
It is very easy to get stuck into the pattern we spoke about above of continually searching for new systems and always blaming the system for your trading outcomes. What is not so easy for many traders is to spot when it is their trading mindset is that is holding them back.
A few clues that your mindset is holding you back;
- You risk more than you should
- You enter trades when you know you really shouldn’t
- You can’t stick to your plan no matter how hard you try
- You can’t pull the trigger even when your system says you should
- You are forever trying to win money back you lost trading
- When in a trade you can’t help but play with the stop’s and targets
- You are often manually taking profit off the table because you don’t want the market to turn on you, even though your system says you should hold the trade
- You are watching and continually checking trades you are in. In other words you can’t just let the market move without you watching it.
These are just some of the clues, but they are the very common ones. Every trader reading this will know straight away if any of these applies to them.
Why do Traders Shoot Themselves in the Foot?
So the next question has to be; if these trading mistakes are so obvious and the traders making them know they are making them, then why are they so hard to stop or avoid?
The answer is actually quite simple. When trading the markets traders are trying to avoid feeling one certain emotion that is; Pain. Everything a trader does is aimed at avoiding this feeling of pain. For example; when a trader loses money they feel pain. To erase this pain and to make it go away, traders will often enter another trade quickly to try and gain back the money they have lost.
They enter this trade hoping that they can win back the lost money and at the same time take away the feeling of pain. Often this next trade the traders enters after a loss is a poor quality setup that will go onto to be another losing trade. This is how a trader can burn through a lot of money very quickly if they don't understand the cycle that is at play.
Another example is when traders either risk too much or over-trade. These traders feel pain because they think they are missing out on something. They think that because they are not trading or only risking a smaller amount they are missing out on what could be larger profits. They don’t like this feeling of pain and so they will risk more or they will enter way too many trades.
This is the same reason for all the emotional trading mistakes traders make and why they continue to go on making them. Traders are human beings and they want to avoid pain at all costs. What they don’t realise is by trying to avoid pain, they are making errors that will bring about the very thing they are trying to avoid!
Working Out the Problems
The first step to a better mindset and erasing the trading mistakes that hold many traders back is to identify all the mistakes you’re making because of your mindset. Whilst we listed a few key mistakes above, there are a lot of them. The easiest way to identify these mistakes in a logical and thorough process is through journaling.
With journaling we have a systematic process for reviewing each and every trade played. The problem most traders have with their journal is that the information collected in the journal is too vague and not anywhere near detailed enough to be helpful.
Whilst most journals will contain the basic information such as the trade entry, stop and eventual result, to gain real benefits it needs to have extra information. If we are using a journal to identify mistakes and especially psychological mistakes we need to include information of how we thought and felt before, during and after the trade.
Below are just a few examples of the extra information that should be included in a trader’s journals;
Before entering the trade
- Why is this trade being entered? Is this trade being entered to win back lost money?
- Is the risk on this trade more than normal? If so why?
- Does this trade fit the plan?
- How does this trade make me feel? Am I nervous or uneasy and if so why?
After exiting the trade
- Did I watch this trade too much?
- Did I stick to the plan or did I mess around with the stops and targets?
- Did I let the trade run even though my plan said to take profit?
- Did I cut my profit short because I was worried the market would turn on me?
The idea of the trading journal is to be able to review not only the individual trades that have been played, but also the processes that went into entering and managing them. The journal is the best way to quickly identify to a trader if they are making mistakes or if their minds are holding them back from achieving success.
The questions you need to include in your journal need to be based on the process that you go through in both finding and managing the trades. The examples above are only a sample of the questions you could include to help you in your regular journal reviews.
How to Fix the Problems
Once you have begun using your journal to its full capabilities, you will be able to begin identifying the critical errors you make and tend to repeat. The best way to use your journal to pick up on mistakes is to have a regular time for reviewing your journal. The best time to do reviews is when the market is closed and you are not in any trading positions.
Once you have begun identifying the mistakes it is all about taking full responsibility and changing your actions. Every trader has to realise that the only reason they have the results they do, is because of the actions they have taken. The only way you are going to change your results is by taking different actions than you have in the past.
Most traders don’t take full responsibility for their trading decisions and look to pass blame onto other factors. It is very common for traders to blame the system they are using, an indicator they have on their charts or the weather outside! They will look to blame anything and everything apart from themselves. The fact is that the only reason you are not getting the results you wish for is because of YOU. Once a trader takes full responsibility for their trading, they can begin changing the decisions they make.
Use Your Journal to Change the Actions You Take in The Future
Trading psychology would not be a problem whatsoever if it did not affect the decisions a trader makes and actions they take. It would also not matter what the traders emotional state was, if those emotions didn’t affect the decisions a trader made. The only reason a trader’s mind set is so important is because the mindset affects the decisions a trader makes.
Each time you review your journal and identify the mistakes that you have made, make notes in your journal. Write down the decisions that you made that that hurt your trading results.
For example; if you begin to identify through your journal that you are watching your trades too much and this is causing you to overmanage your trades, write this down. When you go to enter your next trade you will have a note in your journal reminding you of this previous mistake. You will then be able to change the actions you take, which in turn you will change the results you achieve.
The best traders in the world make great decisions time after time, day in and day out. These top traders realise that trading is a continual process of making improvements. To continue improving a trader has to be able to identify the mistakes they have made, and then be able to change the actions they take in the future to avoid repeating the same mistakes.
A trading journal is a very efficient way to identify trading mistakes that you are making. A journal will quickly pick up on the actions you have taken and show you how it is affecting your results.
The next time your inputting data into your journal remember to add as much detail as possible. Don’t just input the bare minimum such as trade entry and exit price. The more detail you include the more you will be able to take out of it to help you improve your trading.
I hope you have enjoyed this article and would love to hear about your experiences with trading psychology in the comments section below.