Avoidable mistakes may stop you from earning the 6-figure you want to gain from forex trading. Worse yet, mostly, you make these psychological mistakes unknowingly.
This article points out the forex portfolio drawbacks and how to prevent them. Psychologically, these are getting stuck in social proof and compensation mentality
Before taking a deep dive into the three trading mistakes, let’s explore psychology’s background in forex trading.
Forex Trading versus Psychology
People exchange currencies for getting global services. For example, traveling cross-border means getting money in equivalent units as your currency to get consumables in the foreign land.
Also, an investor may find it economical to hold money in a more inflation-resistant currency to avoid losing the value of their wealth in the future. What do these imply? Read more.
The price of a currency pair changes due to political, social, and economic factors. You should balance three analyses to win from forex trading. These are technical, fundamental, and sentimental analysis.
Technical analysis helps you determine when prices will change. Fundamental analysis tells you why prices vary. On the other hand, the sentimental analysis focuses on the price change according to other traders’ forecasts.
Sentimental analysis forms the motivation behind psychology in forex trading. This happens because the opinions of traders affect their buy-or-sell activity. If a majority of traders sell or buy, prices tend to drift in that direction.
And here is where many beginner traders get the catch. They trust personal guts and opinions 90% of the time while ignoring fundamental and technical analysis, as shown below
Fear of Missing Out
Fear of Missing Out Fear of missing out (FOMO) is a reason mentioning forex trading awakens migraine in some investors. They neither want to associate with nor hear anything about forex having burned their forex trading accounts in the past
You listen to what everyone says about price projection. You want to trade quickly with fear that youwill never grab a similar opportunity. In the process, you ignore technical analysis, make bad decisions, and end up losing a chunk of past wins. The solution to FOMO is deciding to rely on personal research for some time. You can decide to quit chatrooms, give the social media groups a break and train yourself to analyze prices for some time
You Fight Back Wrongly
Assume your portfolio grows for weeks without losing. You add money into the portfolio, and your forex investment’s future is promising. Then you suddenly make a huge loss! What do you do to reinstate your account?
This is the point many traders start seeing their portfolio falling. They rush to oversize the portfolio, buying more currency pairs hoping to recover the loss quickly. Soon they can’t withstand the loss anymore because the harder they try to recover the loss, the faster they lose. They become frustrated and can’t logically brainstorm a way to gain, ending up blowing up your portfolio. The remedies to these are trading in small sizes, using trading tools and platforms such as moving average, metatrader4, and collaborative robots to help you make the best decisions
A common cause of failure in forex trading is the gambler’s fallacy. The gambler’s fallacy psychology states that certain traders make decisions with the belief that the probability of an occurrence changing after a repetitive pattern is inevitable.
Here’s a simple explanation.
The fact that tossing a coin five times gives you a head facing up does not mean the next toss must give a tailor vice versa.
Similarly, some traders believe that if a forex pair currency price has risen for weeks or months, it is best to sell the currency because prices will start dropping soon.
Others are stuck in losses because they believe fate is about to shift their portfolio direction, making them wealthier. To halt such a mindset, start befriending technical and fundamental analysis to guide your forex trading decisions.
Now that you understand the psychological mistakes that cost your forex trading portfolio start balancing the three analyses (as explained in this article) to breathe a new life into your portfolio.