Market commentators, article writers and book authors constantly refer to the importance of psychology in relation to your trading. Unfortunately, far too many publications concentrate on a single aspect of psychology; the encouragement of traders to constantly adopt a happy disposition in order to trade.
This disappointing, shallow suggestion, to simply “put on a brave face“, irrespective of what events may transpire, conveniently avoids the other deep psychological issues we may need to overcome, in order to trade effectively.
Overcoming your losses by humming a soothing tune, doesn’t pay the bills and whilst being an optimist is an essential frame of mind to adopt, too many article authors confuse optimism and positive mental attitude with psychology.
Without optimism (if we weren’t optimists), then we probably wouldn’t trade. However, were Forex trading is concerned, you don’t have to necessarily develop optimism (with regards to the markets), in its accepted form, in order to trade successfully.
The typical, happy, optimistic investor will simply buy the indices, buy stocks such as the FANGs (Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG), expecting them to constantly rise in value, which in turn will (fingers crossed) pay for their pension. They attach little in the way of due diligence to their decision making, generally getting caught up in the moment. This herd effect buying is currently visible (March 2017) as U.S. equities continue to reach record highs, in tandem with a surge in private investment.
A recent report highlighted this behaviour; a significant proportion of the investment entering the DJIA and SPX, since the beginning of 2017, has been private money. For example; the largest S&P 500 ETF (SPY) experienced inflows of $8.2bn on Wednesday March 1st 2017, the biggest daily inflow since Dec 2014 (and the second largest in 6 years).
The RSI, our infamous, trusted, oversold and overbought indicator, was screaming out the words “overbought” on a daily chart, from February 9th 2017 as it busted up through the key 70 reading. Let’s not forget that this is an indicator favoured by many analysts and traders at investment bank levels.
Trader type’s Psychology
The cynical, experienced and successful Forex trader is used to shorting the market, they’re far less likely to get caught up in hype, hopium and the “everything is awesome” narrative and zeitgeist. Whilst many MOMO (momentum) equity buy and hold investors are busily getting caught up, the cynical forex trader may be looking to short the: yen, euro and sterling.
The skilful, experienced, profitable forex trader is an optimist, with a key twist on the accepted definition; they’re extremely optimistic about their ability and in their skill set, to take profit out of the market, irrespective of any periods of irrational exuberance that may grip the markets. They’ll profit in both bullish and bearish conditions.
In order to trade Forex successfully they will have developed a unique range of cognitive skills in order to calmly and methodically analyze fundamental, economic calendar events. This will in turn have caused: a global perspective, a grounding, a deep understanding of how macro economic events move markets and has created a realistic mindset, whereby they’re comfortable trading in either bearish, or bullish conditions. This form of clinical and rational optimism is, without doubt, the right attitude to develop in order to achieve excellence.
Article has been provided by Mr. Zahir from FXCC.com