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The Mentality Behind Forex Trading: Do You Trade Forex to Make Money or It Has Another Reason?


Everyone who trades has some type of motive for doing so. You might assume that every trader wants to win money and that’s the only reason why they do it. Although that may seem to be true for some, others find some type of glory in losing. There are several reasons why people trade and this article will cover all of them as well as the cognitive biases of novice traders.

Why People Trade?

As you know, there are several forms of gambling including poker, casinos, a state’s lottery, horse races, etc. No matter what the form, they bring about excitement or drama. And though the likelihood of losing is great and everyone loses at least half the time, people still see them as some form of entertainment and thus, such activities become habit forming.

mentalityAgain, people like to trade for the following reasons:

  1. To make money
  2. For the drama or story to tell others about
  3. For the excitement
  4. To create an emotional roller coaster

Why do you like to trade? Before you become engaged in such a risky activity, you need to realize what it really is that compels you to do it. If you’re not motivated to seek out Forex training or do the grunt work in learning the art of trading, your expectations of making money will be little or none. And if trading doesn’t excite you in any way, you’ll be doing it for no real reason or goal.

While most traders claim they want to make money they’re subconsciously sabotaging themselves from doing just that. More likely, it is some type of thrill they seek repeatedly and/or like to have stories to tell to their friends about.

How do you determine what you want? By following these steps:

  1. Determine what it is about the market that compels you and write it down.
  2. Create a plan to accomplish each thing you want.
  3. Take action and follow each of your plans.

Also, you need to trade with conviction, not fear. If you’re continuously worrying about or fearing losses, you will usually feel uneasy and rather apprehensive about it. As a result, you’ll be more likely to lose on future trades. Remember, strengths beget strengths and weaknesses beget weaknesses. Next, use the 80/20 rule: 80% of your trading is mental and 20% is circumstantial to the market or other external factors. You can change your ways of thinking anytime, but the market never changes and never will. Finally, realize when you’re hot or when you’re cold and act accordingly. If you’re doing well, keep at it, but if not, withdraw from the market for a while and come back when you’re refreshed.

Human Psychology: Cognitive Biases

Avoid falling for these types of cognitive biases that will emotionally influence your trading decisions:

1. Anchoring bias:

This means a common human tendency to assume or rely too much on a piece of information you’ve heard from someone or learned from a personal trading experience. People tend to rely too heavily on readily available facts or myths from sources as the media. For example, one can purchase a particular currency and if it goes down, they decide they won’t sell it assuming it is bound to return to it’s original value sooner or later. If the currency’s value dips extremely low, they may be likely to assume that it can’t go any lower.

2. Confirmation bias:

One may hunt down or interpret information in such a way that confirms with his or her preconceptions on Forex trading. As a result, this person will be subjective when analyzing market data. However, just keep your ego out of this or else you won’t be able to successfully navigate your way through capital markets.

3. Sunk costs effect/irrational escalation:

Such an act occurs when people place more value on money spent on a devalued currency they never resold rather than considering investing their money elsewhere. Instead of reselling their currency which sank in value, they write it off as a loss. In other words, traders under this bias continue to throw good money after bad.

4. Illusion of control

There are certain people who believe they can control everything in their lives. In reality, all one can control is his wants or attitude. No matter what one may believe, he cannot control external events as the market, the weather, or the actions of other people.

5. Information bias:

Traders subject to this type of bias tend to seek out facts even if they have no affect on future actions. This affects everyone who ever asked “why” the market moved in the direction it did.

6. Status quo bias:

Some people prefer to stick with doing what they’ve always done. They form their own comfort zone in trading and usually refuse to break out of it. At the same time, they unconsciously work so hard to preserve their status quo that they close their doors to new opportunities. Their attitude is, this is what I’ve always done and therefore will always do.

7. Outcome bias:

People tend to judge their decisions based on the outcome rather than the logic used to come up with them. Hence, someone who loses at a trade will lose faith in their system and abandon it altogether. Likewise, they’ll discourage other traders from using the same strategies, concluding they’re no good. On the other hand, if they win, they assume they have a sure-fire system where they can’t go wrong. While sticking to a trading plan is good, there are circumstances as the market that might cause you to lose. Never be too focused on the results of a past trade that you’ll expect the same thing to happen over and over again.

People who fall under these biases simply have their foolish pride and don’t want to admit to themselves that they’ve made a mistake or are about to make one. Likewise, they can’t face taking a loss so they continue to hold onto a currency and fearfully tell themselves it is bound to go back up eventually. Others simply believe that they know everything they need to know about trading and that the market will continue to move in the same pattern it always has. Hence, they deny that anything bad will happen and convince themselves they should not to worry about things that might go wrong.

We must always remember that there is no holy grail system in trading. There is no specific strategy or formula that will bring us guaranteed success every time we trade. Likewise, there is no wrong trading plan providing it is well thought out. As long as Forex trading exists, there will always be circumstances that make predicting the perfect trade impossible.

To summarize, you should understand why you want to trade and trade accordingly. Unless you become educated in Forex and learn the ropes of trading, but you can’t expect to make money. If you rather do it for the excitement of it all, then do so. Just don’t let your emotions or your ego dominate your decisions. Also, never make assumptions about FX trading or that the market will continue to move the way it always has. Finally, losses are inevitable. Therefore, you shouldn’t allow bad trading results to affect decisions you make in the future.

Stay positive and remain emotionally neutral. You are only in charge of your desires and your attitude, nothing else.

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LuckScout
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"Whether you think you can, or you think you cannot, you are right." - Henry Ford

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13 thoughts on “The Mentality Behind Forex Trading: Do You Trade Forex to Make Money or It Has Another Reason?
  1. Ambrose says:

    Chris! I see signs of exhaustion in the EUR/USD bearish trend. The forming candle may likely close bullish engulfing on a strong support level. Will you kindly analyze it?

  2. Singh says:

    Great article. Good reminder

  3. Ted says:

    Never get tired of posting Chris. Even if you are repeating your concepts. Repetition is the foundation of all learning.

    Thank you again.

    Ted

  4. Prem says:

    Hi Chris

    This is my first comment although ive read like a million of your articles.

    Of course I, like many others, was very sceptical after being taken on a ride by so many other “GURUs”.

    BUT, YOU SIR ARE A GOOD MAN!

    I want to take this opportunity to Thank You for every Single thing you do for us guys who follow you!

    THANK YOU!

  5. Raj says:

    Completely agree with you Chris. Psychology changes the playground.

  6. krupakar says:

    Hey chris, i have a small doubt, forex market changed over the overs ri8 n constantly changing so we need to change our trading strategy regularly or can we stick with it ??

    • krupakar says:

      Hey chris i have a small doubt, forex market has changed over the years ri8 so we need to change our trading strategy regularly or can we stick with it ???

    • LuckScout LuckScout says:

      You are right. Markets are changed a lot. But it doesn’t make any difference for us because we follow the candlestick patterns and long time frames.

  7. bill p. says:

    Chris
    I’ve been fairly successful scalping using 30 minute chart with the dominate trend.And most if not all the Bollinger band instruction from LuckScout.
    Any recommendations I could add to my system?
    LuckScout my primary site for fx…hands down… Thank You.

    • LuckScout LuckScout says:

      Hi Bill,

      Welcome to LuckScout.

      Congratulations for your success.

      If you are happy what you are doing and you are fairly successful as you mentioned, then I think you’d better not to make any changes and keep on doing what you have been doing so far. Sometimes traders are doing good, but they makes changes with the hope of making more profit, and they ruin the system. When you have found and are following the right track, just keep on doing it.

      Good luck 🙂


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