5 Psychological Challenges Forex Traders Face

Forex Traders face complicated challenges every day. However, the obstacles are not only technical and strategic in nature. The most arduous ones to overcome are perhaps psychological. It's true: psychology plays a leading role in trading, a role that sharply contrasts with the Forex Trader's activity. In the following article, we will provide an overview of the relationship between psychology and Forex. Subsequently, we will describe the biggest "psychological" challenges that traders must face. Finally, we will provide some advice on how to overcome them while minimizing damage as much as possible.

What does psychology have to do with Forex Trading?

This is a question that beginners or aspiring traders often ask themselves when they first hear the two concepts (psychology and Forex Trading) juxtaposed. It's also a question they would do better to answer as soon as possible, since this juxtaposition is not only legitimate but also has a profound impact on their hopes for success. The truth is that Forex Trading is a potentially profitable activity; for some, it is even a source of immense wealth. However, it is also a unique activity, very particular, and - above all - one that generates very intense mental and emotional pressures. Firstly, because it is truly complicated. The consequence is that the probability of making mistakes is always high. This inevitably generates stress, which, if uncontrolled, can cause serious damage, and not only to one's trading career. Stress, after all, when it becomes particularly acute and impairs the performance of tasks, takes on psychological relevance. Secondly, Forex Trading forces one to operate with high stakes by definition. These stakes are money. Of course, some traders are distinguished by their prudence, so they do not invest large amounts of capital in a single trade. The basic principle, however, remains: money is involved, so the fear of losing can be intense, and fear is - like stress - a feeling that can take on psychological importance. Finally, there is an element of - at least partially - technical nature to be noted. Statistics say that trading is the key moment, but it is precisely trading that has the most profound emotional impact. The decisions made in the midst of trading are the most complicated and stressful, as the space and time to decide are reduced: one must act quickly and well, necessarily. In light of all this, it is not surprising that the most famous and wealthy Forex traders in the world are, first and foremost, the traders who have worked best on their psychology, have modified their feelings when necessary, and have faced the question of mentality head-on. This certainly clashes with the image of the trader as an individual practically without emotions, cold and calculating, who certainly does not need to care for his own mind.

The biggest psychological challenges for a trader

The very nature of Forex Trading and, ultimately, that of the man behind the trader, pose some very complicated challenges to overcome, but not impossible ones. Here are the main ones that all traders encounter more or less daily.

Defeat is just around the corner

This is a truth that is very difficult to digest: all Forex Traders lose. Everyone, from the worst to the best, from the poorest to the richest, experiences defeat. Of course, some to a lesser extent than others, but defeat is a reality that belongs to traders in their entirety. Yet, with commitment and dedication, one can make a profit. Regardless of the gain, i.e., the frequency and weight of the wins, digesting the bitter pill of defeat is not easy. The trader may have put in a lot of effort, yet still lose the trade. Feelings of discouragement, drops in self-esteem, and even burnout can come into play. This is why the psychological challenge of defeat is really difficult to overcome. It is not just a question of money, but also of emotional investment.

The market is uncontrollable

Man is afraid of uncertainty by definition. It is to placate uncertainty that, for example, he created mythology. It is to remove or mitigate uncertainty that he set out on the perilous path of technological progress. Uncertainty generates imbalances in everyone, even in those who define themselves as attracted to surprise. Now Forex is one of the most uncertain "places" imaginable. Uncertainty reigns supreme or, better yet, unpredictability. Of course, it is possible to employ tools that allow one to potentially predict what the price will do, but we are in the realm of statistics, not mathematical certainty. The awareness of not being able to control the market even minimally has a profound impact on the trader's emotional resilience, representing a decisive psychological challenge.

The fallacy of analysis

This is a corollary to the previous point. If the market is uncontrollable, if any hope of certain prediction is precluded a priori, then technical and fundamental analysis is doomed to fail. Yet it is touted as the more or less secure foothold on which Forex Traders can rely to understand what this or that currency will do. Unfortunately, this is exactly the case. Analysis, both technical and fundamental, no matter how well done, carried out taking the necessary precautions, can fail. This can cause stress and discouragement for at least two reasons: firstly, because the Forex Trader has invested effort, time, and cognitive resources in the analysis, so realizing that his effort was in vain certainly has an impact. Secondly, it increases the perception of uncertainty. In reality, analysis should be taken for what it is: a tool not to predict an unpredictable future, but a source of strategic elements that are valid statistically, i.e., based - in the best case - on a more or less wide margin of error.

Temperament is not enough

Another truth, which is somewhat a consequence of the previous ones, is that the trader, as a man... Is not enough for himself. That is, he does not have the physiological tools to defeat the market always and in any case, to win against all odds. In short, the trader, even the best one, risks wandering the market like a creature, if not defenseless, at least destined to be perpetually in difficulty. This is a complicated truth to digest, as it calls into question one's opinion of oneself, one's self-confidence. In a sense, it is like acknowledging having weaknesses and not being able to do anything to remove them. Here, the fallacy is inherent in the trader as a man.

Nothing lasts forever

Above all, one's approach to trading. Or, to be more precise, the strategy. It's really true: no matter how successful a strategy may prove to be, no matter how much it manages - with the inevitable negative moments - to produce profits, sooner or later the time will come to change it. The reason for this is simple: the trading style changes, the market evolves. Now, changing a strategy that until recently had proven to work is very complicated. Firstly, because the unknown is always scary. Secondly, because routine and the force of habit have a significant impact from a behavioral point of view. Yet it is a step that, at times, must be taken, with all that this entails in terms of stress.

How to overcome psychological challenges

These challenges appear really arduous, complicated to overcome. Yet there is no doubt: it is possible to overcome these obstacles. In fact, successful traders have succeeded precisely in doing this: overcoming psychological challenges. How did they do it? Essentially, there are three methods (and they are not mutually exclusive). The first method is psychological training. No, this is not psychotherapy, but a path that leads (hopefully in the shortest possible time) to developing moral qualities, to developing resilience. Resilience in particular is one of the most useful tools for overcoming the psychological trials to which the Forex Trader is subjected. Of course, doing it alone is difficult. Many get help from a mental coach. Certainly, overcoming obstacles first and foremost requires a profound and intimate change. The second method is actually a discipline: money management, which must necessarily be accompanied by risk management. Together, they allow managing losses and containing risk, transforming the worst possible scenario (at least that) into something quantifiable. Money management is a scalable practice: some of the actions that can be implemented are very simple, others are quite complicated and accompany very bold trading actions. Finally, there is what many consider an extreme solution, but can actually represent a useful tool to lighten the trader's burden: software. In this case, obviously, the burden is not only psychological but also physical. Software that manages trading on behalf of the trader allows freeing up time for the latter, reducing his effort to a minimum. From a psychological point of view, on the other hand, they allow the Forex Trader to be absent during trading, which is the moment when psychological challenges become more arduous and risk diminishing the effectiveness of the trading action (in addition to causing, as we have seen, a lot of discomfort).