Trading seems so easy on the surface. Forex beginners are told (and believe), "Just follow the rules of your methodology and trading plan and you are on your way to achieving your dreams. Oh, and by the way, keep your emotions in check."
This little addition, "just keep your emotions in check", comes to haunt practically every new trader until they learn to control their emotions.
Curiously the highly left brained trader (logical problem solving) always underestimates the influence that our right brain (emotions) has over a trader’s ability to think efficiently.
Here they get stuck in a way of believing that on a basic level, that if we really know the underlying laws that logically govern the market, then we will succeed. This believe depends on the existence of a set of rules that, once found, will be the Holy Grail of forex trading success. This is the left brain way of thinking.
However, the kind of thinking that a trader’s mind produces (for better or worse) comes out of the emotional state of the trader. And that is what generates the trader’s vision of the market. The world the forex trader sees is impacted by the state of mind of the trader who surveys the world. And this is where traders get in trouble.
Thinking and decisions are emotional state dependent
The state of mind follows emotion. You trigger to emotion based on a change of an established familiar pattern. Next your thinking comes from the emotional cloud. As a matter of fact, it is not rational at all. We generate our understanding of the world from the variations of our deepest worries and desires.Most traders actually lose it even before their trading day begins. They enter their trading day in a cloud of fears. Most of the do not recognize this fear pushing it out of their mind so they can avoid dealing with it.From this state of fear, their right brain’s biological wiring biases their evaluation of trading chances. The emotion heats up and seizes any semblance of objective evaluation of the market, and either the trader jumps in on impulse to avoid having even more fear or he stays on the side line of the trade, waiting for another proof and the opening goes by.
When the trader goes back and analyses his trades, he looks at his positions in disbelief and asks, "What was I thinking? I know how to trade - how could I have possibly made such a stupid decision?" The difference between the thinking from which he later evaluates his trading day and the thinking that drove his trading during heat of the trade is his emotional state. Even before his trading day started, his thinking was degraded by fear. In this state of mind he/she evaluated the market. That mindset saw threat, not a chance to win. That mindset blinded him and focused on the avoidance of fear and possibility to lose. As the result he acted irrationally and made decisions not consistent with his trading plan.
Next, the trading day was over and the trader was in another (calm) state of mind. He evaluates his trades and could not understand why he traded so foolishly. In his rationally trained mind he can execute trades with confidence and consistency. Unfortunately, when the trader is not able to control his emotions, his perception of market is distorted and ,in fact, wrong.
The First Step to Emotional State Management
People do not realize what an emotion is and what it does. However, forex trader must grasp the power an emotion has over thought, particularly fear and greed. First, emotions are biological in nature. They take over our psychology. They are not part of our psychology however they define our psychology (our vision of the world).
Fear, in particular, is the basic emotion. It is designed for our biological survival however a forex trader must learn how to manage it. The trader must understand that fear will never be entirely eliminated from a trader’s mind. Nevertheless its strength can be controlled so that it does not sweep the mind away. Once managed, fear can be regulated in a positive way to help build an effective risk management.
Most traders try to push fear aside or disregard it. This certainly can be done on a short term basis, but as far as the long term trading is concerned fears cannot be sustained successfully.
Traders must learn to about their inner struggle with the fears. To do this, the fear must be approached - not avoided or attacked. When the trader approaches his fears and learns from them, he creates the opportunity to restructure his thinking and re-organize himself into a more effective trader.
Basic emotional state management principles apply here. Your body, your brain, and your mind have to be calmed to begin this process. Otherwise the chemical nature of fear in the body will quickly reach high levels of arousal and will hijack the trader’s capacity to maintain a calm state of mind. To interrupt this process, traders will need to learn to volitionally breathe diaphragmatically. This long slow style of breathing impacts the heart rate which is connected to the "fight or flight" response that is part of our primitive survival brain. Without interrupting the arousal of an emotion with this kind of deep slow breathing, the trader, in effect, is adding gasoline on the fire of an emotion - particularly fear. If not managed, the emotion will explode and take over thinking.
This is not the "cure" to compromised thinking. It is the first aid relief of an emotional hijacking - much like an emergency room physician is going to first stop the bleeding before the real problem is addressed. The calmness releases tension from the body, which in turn helps slow down thinking. A calmer mind is necessary to develop the powerful skills of discipline, patience, impartiality, and courage that are so important to peak performance trading. This is where the trader’s state of mind for peak performance can be developed.
Second Step: Mindfulness for a Peak Performance
Getting your body, brain, and mind calm does not solve the problem entirely. However it can give the trader some skills and tools on the first level of emotional state management.Next you need to develop an awareness of the thoughts in your mind and begin to analyze. You are now an observer of the thoughts in the mind and you do not just drift wherever your thoughts take you.
Imagine being in front of your computer screens waiting for a set up to appear. You are waiting with anticipation as several possibilities emerge. You watch as the possible trade approaches the entry point. Now it is at the entry point and you find yourself looking for confirmation and more confirmation. Tune into the conversation in your mind as you watch this trade. "Should I take this trade? What if I’m wrong? I need a little more confirmation before I pull the trigger! It’s here; pull the trigger before this one slips by? Are you sure?"
Have you ever found yourself in this type of internal conversation? If you are not lying to yourself (mindlessness) - then sure you have. In this case though, you are being asked to be mindful of your thoughts rather than to be swept away by them without observing them. Without training, most of us get swept away into this line of thinking without ever waking up to the activity going on in our mind. This is called mindlessness. And it produces disastrous trading results. Being mindless while trading is a set up for failure.
With applied mindfulness training specifically for trading, the trader becomes a witness to his internal thoughts rather than a blind victim. This "thinking" that you have now become mindful of can now be examined. What you learn in the development of mindfulness is that you and your thoughts are not the same. In fact, a more powerful question arises. Where do these thoughts come from?
We Trade Our Hidden Beliefs
In the detached, calm assertive state of mind we realize that thoughts are manifestations of our deepest beliefs and biases about ourselves, our worth, our (in)adequacy, and our ability to control, change or influence the world around us. This is the central idea around which we have to re-organize ourselves to become better traders. Most traders subconsciously avoid this important inspection of themselves and their deepest beliefs about who they really are. This is a short term discomfort, so our biology automatically avoids it. It all shows in trading though. In trading there is no place to hide from our fears for long time. It inevitably shows up in the trading behavior and in the trading accounts.
Our thoughts manifest in the conversations while in the midst of trading decisions. Until we develop the emotional intelligence to face our fears and learn from them, the trader will keep producing mediocrity. By calming the fear to an acceptable level, the traders approach their own personal demons that keep them from organizing themselves into a peak performance trader. In mindfulness, we separate our identity from the historical beliefs that we were born into. It is a powerful possibility. We are freed from the power of our fears so that we can rediscover much more powerful meaning. And from this deeper sense of self, the trader can establishe the discipline, the tolerance, the self-confidence, the objectivity, and courage to change him or herself.
This aspect of developing your state of mind can be called the re-invention of the self.
Emotional regulation leads the trader to a stability where he can sit with his fears and resolve them - rather than avoiding them. In applied mindfulness training, the trader develops the skills of separating his identity from his thought life. With further development, the trader begins to direct his attention mindfully and brings into the light of his awareness the discipline, confidence, impartiality, patience, and courage that are needed to blossom into a peak performance trader. This internal struggle goes on within every forex trader. Especially the forex beginner. It is a process of knowing the self and facing your fears. The outcome is rewarding. It is not just success in trading but also a meaningful, and joyful life. It begins by equipping yourself to embrace your deepest emotions and fears that manifest in your trading.
With an open mind, you become what you really are and forex trading is your friend and teacher.
Also read Forex Trading Psychology
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