Forex Trading is not just about coldly analyzing charts, investing, and waiting for results. It's not a mechanical activity (or at least not entirely). After all, the image of the winning trader, portrayed as an imperturbable money-making machine, is a misconception. A trader is human, and as such, their actions and thoughts are governed by
their psyche. Above all, they are an individual endowed with psychological capital, just like everyone else.
It is this
psychological capital that plays an essential role in trading, ultimately determining the chances of success. In the following article, we provide an overview of this interesting concept and offer some advice on cultivating good psychological capital and effectively harnessing it to increase profits.
What is Psychological Capital?
First, let's define psychological capital. In truth, the name says it all, although - for the sake of complete understanding - it is necessary to outline its boundaries.
Psychological capital refers to a set of purely mental elements, namely:
- The ways of reacting to negative events.
- The ways of reacting to stressful situations.
- Thoughts about oneself.
- Thoughts about one's future.
Thus, psychological capital includes the ability to withstand shocks or, conversely, the tendency to become discouraged. Similarly, it encompasses the capacity to endure events with uncertain outcomes but still characterized by a certain degree of stress, as well as the
inability to do so and the tendency to adopt an unclear approach. Psychological capital includes
self-esteem as well as
self-doubt, optimism for the future as well as pessimism.
Everyone possesses psychological capital because, quite simply, everyone has lived and specifically experienced victory and defeat, and particularly stressful periods of life. Moreover, it is impossible for an individual not to have a precise self-image and not to think about the future.
Good Psychological Capital and Bad Psychological Capital
It is evident that, while everyone has psychological capital, not everyone has it of the
same quality. Without detracting from the physiological respect that must be paid to every human being, especially when discussing their psychological sphere, this aspect must be considered:
some psychological capital is useful, or good; others are potentially harmful, or bad. This is true at least in a trading context, but it could also apply to contexts where a certain level of performance is required. But what is meant by good and bad psychological capital?
In a sense, we answered this in the previous paragraph when we presented each "part of the capital" in a dichotomous form.
Therefore, good psychological capital is one in which
a certain ability to tolerate defeats predominates, perhaps seeing them as an opportunity for growth. In other words, so-called resilience.
Similarly, good psychological capital allows the individual to
resist stress or at least not be crushed by it. The same can be said of psychological capital characterized by
a serene and moderate optimism for the future, accompanied by good self-esteem.
It follows that bad psychological capital is characterized by:
- Low self-esteem
- Chronic and generally unfounded pessimism about the future
- A tendency to panic under stressful conditions or at least to lose clarity
- A tendency to become discouraged in the face of defeat or negative events, which leads to compromised clarity and reduced willpower
So far, everything is clear. The main problem is not in understanding psychological capital in a sterile manner, but rather in:
- Recognizing the quality of one's own psychological capital
- Improving it if necessary
Psychological Capital in Trading
Psychological capital is of great importance for trading activity. In a sense, it determines its fate. This is an undeniable fact.
It is simply impossible for psychological capital and trading to take separate paths. After all, this is true for any activity that requires a minimum of commitment and is characterized by a significant level of difficulty.
The role of psychological capital in trading is evident for some specific reasons:
- All traders experience, to varying degrees, the experience of defeat. Even the best, those who truly succeed in creating wealth from trading, are defeated sometimes (often, to be honest).
- All traders, absolutely all of them, live in stressful situations. After all, we are talking about investing one's own money. Above all, investing it in a context characterized by an inherently high level of risk.
- The quality of one's actions and approach to action itself depends on self-esteem and the way one looks to the future, and this applies to trading as well as any other activity.
Therefore, if a trader's psychological capital is good, they will be able to:
- Ensure that defeats do not affect their trading action or push them to deviate from their goals and strategy.
- Better manage risk. It is precisely this that determines a strong state of stress.
- Persevere with their strategy in a convinced manner (by virtue of their self-esteem as well).
- Commit themselves more and more, make sacrifices, as they are optimistic or at least hopeful.
Obviously, traders arrive at their debut in the market with pre-formed psychological capital. Everyone has a history behind them, and this history has shaped their psyche.
So, are the games already decided? Not necessarily. While it is true that psychological capital represents an element that pre-exists trading activity, this does not imply that it cannot be enriched or improved.
It is a long journey, which largely takes place outside of trading and involves, rather, the relationship with oneself.
Clearly, this is not the place to offer psychological advice, but we can mention some elements that unequivocally recur in every attempt at emotional and psychological growth:
- Analysis of one's life experiences
- Interpreting one's life experiences from different angles
- Identifying events that demonstrate the presence of good psychological capital
- Acquiring new self-awareness
It is, therefore, a matter of establishing a good dialogue with oneself and demonstrating to one's "self" that yes,
resilience, optimism, endurance, and self-esteem are within reach simply because, in the past, they have been used at least once.
As already specified, it is a difficult journey that many are able to undertake. Those who succeed, however, find themselves with an invaluable treasure to be harnessed for their trading activity but, above all, in everyday life.
