Every trader is vulnerable to the many emotions that come with trading. If we allow our emotions to dictate our trading decisions, then it is very likely that we will make irrational decisions that are based solely on emotion, rather than on sound trading practices.
Well, you may be surprised to see your strategies not working and your results lacking when you come back to trading after the time off. While breaks are always a great thing and everyone should take regular breaks, taking time completely off trading for a month or more will probably get you out of the flow state you were in when you were profitable. Then, when you try to return without preparing first you will most probably be confused as to why you are not trading like you used to a few months ago.
Well, you probably have seen this. It’s habitual for most people.
It is known as the confirmation bias in psychology.
Basically, it describes how humans make decisions that have nothing to do with rationality or objective confirmation of one’s view. On the contrary, the confirmation bias is a tendency for humans to seek confirmation of their views where there is very little of it or none.
Patience is regarded as one of the greatest human virtues in almost all religions and spiritual traditions. Patience, whether virtue or not, is definitely a very beneficial and profitable characteristic when it comes to trading the Forex market.
Most traders know the feeling. They spend years building a trading strategy, trying to trade on demo accounts and then, after lengthy and careful contemplating, they find the confidence to go out into the world of real trading.
A lot of things in Forex trading and generally in our lives are simply outside of our control.
You may have the perfect signal, or in fact, a multitude of signals - all converging and agreeing that a particular currency pair should be moving higher or lower. Nevertheless, there is always some probability that any signal or setup will fail and the market will go in the opposite way. But the important thing to realize is that we can not control the outcome of the trading setup and therefore the chance of being wrong should not disturb us.
It’s easier to deal with fear when you realize that the emotion of fear cannot exist if it is not preceded by worry which is preceded by doubt. In fact, it all usually starts with a tiny bit of doubt about a small aspect of a perfectly fine trade. The doubt soon turns into worry which soon turns into fear and that soon causes the trader to emotionally act on his/her positions.
In investing and in life generally, we want to pay for assets, products or services that are at least at a fair price in order for those to be valuable in the longer term.
Generally, it is seen as something negative and everybody wants to avoid it, but experienced traders realize that losing is the only thing we can control through money management.
The approach towards losses is clear: they have to be as small as possible. The lower a loss is the better.
Values-Driven Forex Traders are generally independent individuals that are able to make good and rational decisions. They tend to be realistic, they know what their values in life are and they are mainly driven by them – including, to a large degree in trading as well.
Generally, those values for them would be people and relationships, life principles and material possessions.
This type of a trader, however, will often find it very helpful to work in a group or together with others. Even letting someone else trade their money is a very good option for them since they lack a lot of key qualities that are important for traders.
Having others trade for them can be a much better way for those who simply are not suited for the trading arena. After all, they might have another job and be really good at other things but not everyone can be great at trading, and realizing that is an important part of being successful. Once one is aware of their weaknesses they can deal with them in an appropriate manner and one way to do it in case of trading is to let a professional trade for you.
That of course, doesn’t mean that they will achieve success without putting any work, but what Dr. Tharp suggested with this is that Strategic Traders and Planning Traders (the other best-suited trader type) will find it easier to achieve success in trading compared to the other types of traders who will generally need to put more effort.
The Forex market is widely known as the world’s largest financial market, in the past only available to professionals from the banking sector, but now with the technological advancements in recent decades, the largest financial market is accessible for many retail traders as well.
Out of those 15, 3 were dubbed by Tharp as the types with the lowest possibility of becoming successful Forex Traders in the long term.
Spontaneous Traders are normally people who can make quick trading decisions and then act on them without much effort.
In his research on trading psychology, Dr. Van K. Tharp identified fifteen psychological profiles of traders. Further, he differentiates 3 sections of these 15 trader types each with different probabilities for success in the long term. The Socially Responsible Trader falls in the group of Forex traders that can succeed if they are prepared to put in a lot of effort in order to overcome their challenges and weaknesses.
As part of a trading journey, a forex trader will come across many different trading strategies and systems. Today, there are countless ways to trade the forex market – including a manual trading strategy based on technical indicators, or trading using fundamental economic indicators.
Continuing our series on Dr. Van K. Tharp’s trading psychological profiles, the next trader type we will discuss in this article is the Independent Forex Trader.
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