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7 Common Psychological Challenges of Trading Forex

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The psychological challenges of trading forex or any other financial market are some of the reasons why many retail traders fail in this business.

Trading can be an extremely challenging endeavor, especially for beginners. While many traders believe the key to success is to find a profitable trading system, most underestimate the psychological challenges of trading.

Together, we will go through some of the 7 common psychological challenges traders experience during their trading careers.

7 common psychological challenges in trading

1# Addiction to trading

Trading the financial markets can be as addictive as any other type of addiction. It is a serious condition that drives traders into compulsive behavior with harmful consequences. As novice traders experience their first profit out of a random trade can have a huge psychological impact on their future behavior.

The recorded memory of that great moment of winning a trade motivates them to keep trying until they get a winning trade again to experience that same feeling of pleasure and satisfaction. With that comes the expectation of repeating the same behavior again and again, even after a negative streak and regardless of the overall market condition.

Trading addiction can be detrimental to your health and your financial situation. Before you start trading, you need to write down the reasons why you want to trade and your expectations. This is a good exercise to keep track of your trading behavior and to stay focused on your goals.  Remember to keep your reasons and your expectations as realistic as possible.

If you notice a change in your trading behavior, step back from trading, and take a break. You need to empty your mind and reassess your trading expectations. You can resume trading whenever you are ready.

2# Overconfidence

This is one of the classic psychological challenges of trading that many traders suffer from. This comes as a result of a long streak of winning trades increasing the traders’ feelings that they can beat the market at its own game.

Traders start to believe that they know exactly what the market will do next and they “cannot lose a trade” or be wrong at all. Many traders struggle with this feeling early in their trading career. It is not uncommon for seasoned traders to become careless and destroy their trading account by doing the same thing.

What tends to happen is that as traders hit more winning trades, they are tempted to deviate from their trading plan by overtrading or overexposing their capital. This ends up negatively impacting their performance and damaging their ability to act rationally.

It is important to keep your confidence under control as you’re making money by sticking to your trading plan. If you feel tempted to do any sort of unwanted behavior, you can always take a break from trading to re-evaluate your state of mind. Once you are feeling calm and able to make rational decisions you can resume trading.

So remember, during winning streaks always take a break.

3# Gambling on losses

Hoping losses will turn winners is one of the psychological challenges of trading that is hard to overcome, especially for novice traders.

Traders tend to close winning trades too early and let their losers run until they get a margin call. Accepting a loss is a hard pill to swallow, especially if it involves losing money.

The main goal here is to make money and not the way around. The sooner you close a losing trade, the better you feel and the more you stay in the game.

Instead, traders either place trades without proper stop losses or keep moving it hoping that at some point the market will turn and go their way.

Imagine yourself in this situation, you see a trading opportunity you are sure it’s a win. Then you place the trade but due to some market events, it goes against you. Now you are still in the red but you are confident that it will soon turn around.

You don’t want to be stopped out so you move your stop a few pips away from your original stop price! Still in the red. But you can’t close it now, what if it turns back?

So, you tell yourself to wait and hope it will turn and at least break even before you exit. Now the loss is too much, you think it’s probably a good idea for you to exit. But it’s late now and you’ve probably drained half of your account!

Have you ever been here?

Usually, the situation only gets worse and the chance of draining your account gets even higher.

The best way to avoid this situation is to set your risk limit at a specific percentage that you are comfortable losing. For example, you can set your risk at 2% for every trade you place. Once you enter the trade don’t touch your stop.  If price hits it, forget about the trade you just lost and move on to the next trading opportunity.

The loss is too small to bother you and won’t stop you from moving on to the next trading opportunity. However, if the percentage you are risking is greater than what you are comfortable losing in a single trade, it will not just hurt your trading ability to move on but also hurt your trading capital.

4# Fear of missing out (FOMO)

FOMO is the fear of missing out on an event or an opportunity that may currently be happening elsewhere. This feeling is heightened by emotions like excitement, greed, impatience, and jealousy. 

In trading, the Fear of Missing Out on a big opportunity in the markets is a common problem many traders will experience during their trading careers. FOMO can affect everyone, from new traders with retail accounts through to professional traders.

For example, if a trader sees a post on social media of traders buying and enjoying the big rally on a specific asset, he will experience FOMO. The anxiety and fear of missing out will entice him to take action right now by following the herd.

Emotions are often a key driving force behind FOMO. If left unchecked, they can lead traders to neglect trading plans and exceed comfortable levels of risk.

For some, the sense of FOMO created by seeing others succeed is only heightened by fast-paced markets and volatility; it feels like there is a lot to miss out on.

To overcome FOMO, you simply need to become more self-aware and understand that there will always be another trade. This might not be immediate, but the right opportunities are worth the wait.

Another tip to help you overcome FOMO is to stay away from social media or the news while trading. This will help you stay focused and disciplined in your trading.

5# Fear and greed

Whether you are a beginner or an advanced trader, fear and greed have huge psychological impacts that affect your performance. 

Rising prices are a good example of greed as traders want to make more money from the rally, and when prices are falling, fear is taking over. 

Fear of losing money can be both good and bad. You just need to find the right balance and not have too much fear. Fear of blowing out your trading account will cause you to place stop losses on all your trades. This is a good thing. But fear can also work against you too.

Fear can hold you back from entering a good trade setup only because you are afraid of losing money. The other reason traders become afraid to trade is when they have been risking too much money and have just lost more than they can handle.

Greed is very different to fear but can easily destroy traders if not managed appropriately. It tends to arise when a trader decides to take advantage of a winning trade by devoting more money to the same trade, in the hope that the market will continue to move in the trader’s favor.

Greed can also surface when traders experience a losing trade and decide to ‘double down’. They do it in the hope that throwing more money at the problem will help the position turn positive. From a risk management point of view, this is very risky. If the market continues to move against the trader, this can quickly turn into a margin call.

Greed has appeared many times in the financial markets. One time during the dot-com bubble; where individuals bought more internet stocks and inflated their value tremendously before it all came crashing down.

A more recent example is bitcoin; investors piled into the cryptocurrency thinking it could only increase in value before it too came crashing down.

6# Having unrealistic expectations

There is nothing wrong with having expectations, as long as they are realistic and based on actual results. Most of the time, traders lose money trading because their expectations are not aligned with the reality of the market.

Usually, novice traders come to the market to make big money and win on every trade. This is not how the market works. Successful traders know that every day is a new day and what happened yesterday might not happen today. Also, professionals trade what the market is offering not what they think should happen.

If you can keep your expectations to a minimum you’ll put yourself in the most productive mindset possible to make consistent money from trading the markets.

The best way to keep your expectations in line with reality is to risk as low as possible on each trade you place. Of course, this is easier said than done but with a strict risk management strategy, a disciplined mindset, and a better understanding of the market dynamics will keep you connected with reality. 

As traders, we are presented every day with an endless stream of opportunity to make money. This leads us to over trading, chasing dreams of becoming a millionaire. Nothing in life has the potential to cause more damage than unmet expectations. Realistic or not, our expectations are a projection of something we expect to happen in the future.

7# Demo trading versus live trading

The psychological challenges of trading and replicating the same results on a live account can have a negative impact on someone’s future performance.

Some traders are having difficulties replicating their success in demo account to a live account in their first few months of live trading. This is possibly a result of underestimating the psychological differences between demo and live trading and no longer being able to make the right adjustments for it. 

Remember that success in demo trading doesn’t necessarily mean your live trading experience will be profitable too. By maintaining a strong mindset and working on regular execution can be the key to long-term profits.

The pressure to make up for a losing streak on a live account is also considerably stronger compared to having a drawdown on demo. When you’re trading a live account, every consecutive losing trade hits you harder because you know that you will have to come up with really good trading ideas to just breakeven. In demo, even as the losses might hurt your pride, you know in the back of your mind that you can always start over with no damage. 

Despite that, demo trading is a good way to practice your trading skills without the chance of risking real money. It is also an effective technique of testing a newly developed strategy by monitoring its results before making adjustments.

Also read about 7 Trading Psychology Tips for Beginner Traders.

Conclusion

Overcoming these common psychological challenges of trading forex is an ongoing process that takes dedication and hard work. By working on your trading psychology, you can formulate a program to remove the challenges that keep you from achieving success.

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