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March 21, 2021

Top Trading Psychology Lessons in 2020

 Another year gone means another year of trading psychology lessons! Just before they closed shop for the year I’ve surveyed the rest of the FX-Men for their hard-earned lessons for the year.

Here are the most common themes:

1. Just take the trade

If you’ve been trading forex long enough, then you’ll know that there are bajillion things that can affect forex price action. The problem starts when you try to brace for ALL of them.

While preparing for every scenario you can think of improves your odds of making a successful trade, it can also subject you to “paralysis analysis” where you avoid risks by not taking trades at all.

Just ask Happy Pip and Huck who lost potential winners when they hesitated to take perfectly sound trade setups.

Remember that you can never prepare for ALL catalysts that might affect your trade. Just cover the basics, plan as best as you can, and then TAKE YOUR TRADES.

Don’t waste the time and effort you’ve put into your analyses by staying in the sidelines. If you manage your risk well, it’s likely that a loss won’t make much of a dent on your account anyway.

2. Consider not-so-perfect entries and exits

We’ve always encouraged patience in executing trade ideas. At the very least, patience promotes discipline needed to execute your trades as planned.

But markets are not always rational. Prices won’t always dip to your desired entry levels and they won’t always hit your profit targets.

Cyclopip, for example, missed a big trend trade on GBP/AUD when he nixed the idea because it didn’t dip down enough to hit his entry level. Meanwhile, Huck avoided a heartbreak by closing her GBP/USD long trade when it failed to make new highs.

Our jobs as traders is to manage risk when we’re wrong (i.e., lose as little as possible) and maximize our gains when we’re right. Make a habit of revisiting your initial trade ideas and be flexible enough to adjust your entry and exit levels when current market conditions call for it.

3. Avoid recency bias

Succumbing to recency bias is perhaps one of the most common trading problems out there, so it’s no surprise that the FX-Men continue to see it pop up on their trading journals.

For newbies out there, know that “recency bias” refers to the tendency of traders to place more weight on recent events rather than the older pieces of information. More often than not, this pertains to traders getting discouraged (or overconfident) as a result of their more recent trades.

Happy Pip, for example, hesitated to take her perfectly sound GBP/CAD trade idea because her CAD/CHF loss was still fresh on her mind. Huck, on the other hand, was not satisfied with avoiding a loss on her USD/JPY trade because she compared it to a previous USD/JPY trade where she got tons of pips.

How you traded your previous setups shouldn’t factor in your succeeding trades. Keep your confidence intact by remembering that losses are as much part of trading as gains, and keep your ego in check by knowing that there are always things you can do to improve your execution.

4. Make allowances for volatility

Last year, the FX-Men realized that setting wide stops can also be a form of poor risk management. This time around, we’re waging war against tight stop losses.

Huck’s USD/CHF short could’ve gotten at least 100 pips further had it not hit an adjusted stop around a shallow retracement. Meanwhile, Happy Pip missed a huge EUR/AUD breakout when her adjusted stop got triggered.

While adjusting stops is a good way to limit risks (especially around major events), it can also prematurely take you out of a good trade.

Managing risk means minimizing losses and maximizing profits. Note that it doesn’t necessarily mean taking profits as soon as you can.

Unless future prospects significantly weigh against your current position, or if you don’t think your trade can stand the volatility around a forex event, then consider making allowances for event-related volatility.

5. Don’t sweat the stats (too much)

Stats are reflections of one’s PAST performances. And while they could be useful in tracking your progress or fine-tuning your process, they can also keep you from taking risks.

Imagine a basketball player who’s too watchful over his stats. He wants to up his numbers so he hogs the ball instead of passing to his teammates. He takes unnecessary risks by forcing a play. Unfortunately, it didn’t pay off and his team ended up losing the game.

For traders, stats can help you track your progress, identify strengths and weaknesses, and compare yourself to other traders. What it DOESN’T do is win trades for you.

While looking at major stats will help you become a better trader, focusing on the numbers can expose you to making trading psychology mistakes. For example, a need to extend your winning streak could make you cut a winning trade and limit your profits.

Just like you would only risk money you can afford to lose so you can focus on executing your trades, you should also put your performance worries in the background and focus on getting one good trade after another.

That’s it for our list this year, folks! Do you have any hard-earned lesson you’d like to add? Don’t hesitate to share to the community!