Forex Trading Psychology:
Consistency, Discipline and Confidence
Profitable trading is the result of the trader
having their business in order in three primary areas. These
are the system, risk and money management rules, and the
trading psychology. Trading Psychology means the big 3:
discipline, confidence and consistency.
Of these, trading psychology is of
the greatest priority in order to ensure that the other two are
fully utilized. A good system and rules are of limited value
when they are not followed. To make the most of your system and
your rules, and to do so in a manner that is not through sheer
will and brute force, it takes all of the Big 3: confidence,
discipline and consistency in that order.
It is almost impossible to stick to your rules and your system
for any length of time without confidence in your system. A
trader may be able to stick to their system for a short while
simply by focusing on it, but confidence and discipline are
often lost quickly once a handful of losing trades
occurs.
The temptation to deviate from
their system and second-guess it can be very strong when a
string of losses occurs, especially for the trader that has not
established a solid confidence in their system. The natural
impulse to avoid the pain is great and only grows with each
subsequent loss. Faith in the system drops each time another
loss occurs, even if the loss came to be from the deviation
from the system. In this situation, anxiety, fear and doubts
tend to be very strong.
If this circumstance has occurred,
then what is a trader to do to remedy it?
Expectations and reality are the
source of much in trading psychology. When expectations are not
met by reality, frustration sets in. When a person doesn't know
what to expect, then anxiety set in. A person can have
confidence when they know what to expect and what to do. How
can a person be confident when they don't know, or worse yet,
when their most immediate reference point is the recent and
very painful losses?
Since trading is an activity where
losing trades will occur, the best way to establish confidence
is to have a way to know what to expect - from the trading
system. How can you this be done? Proper system analysis and
evaluation of the system metrics allow the trader to know what
to expect and what not to expect. The metrics give one a
realistic and measured look at the capabilities and limitations
of a system, particularly how many losing trades might be
encountered during an overall profitable period of time. The
metrics are of particular help with trading psychology in that
the discipline becomes easy now that realistic expectations are
set and establish a level of confidence.
Tracking of the metrics then leads
to consistency and facilitates continuous improvement. When a
trader begins the practice of analyzing their system and
tracking their metrics, this often is where major breakthroughs
occur. This practice frequently marks the turnaround point for
most traders as it leads very naturally to consistency,
confidence and discipline. When it comes to trading psychology,
backtesting alone only helps so much, and that is why it is
critical that a trader properly analyze their system and track
their metrics.
Proper analysis that yields
meaningful useful information is very worth while, yet can be a
chore. To get your own user-friendly tool to perform trading
system analysis, plus track your metrics to boost your
confidence, discipline and consistency, go
to http://insideouttrading.com/tpa/ccandd.html
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