Trading Psychology: Reacting to Success and Failure

Psychology and trading, a combination that many are unaware of but is real and tangible, with dynamics that can heavily impact performance, ultimately determining a trader's failure or success. These dynamics are not part of the cultural heritage of those who approach online trading from the outside, to the extent that the belief that a winning trader is astute, calculating, courageous, and immune to emotional upheavals is still widespread. The truth is that a trader is human, and therefore vulnerable, regardless of their skills. This is just a small taste of the relationship between psychology and trading, the tip of the iceberg. In reality, there's much more. We'll discuss this in this article, proposing a focus on two situations at opposite ends of the spectrum but actually have a lot in common: winning and losing.

What does psychology have to do with trading

Before addressing the themes of winning and losing, it's important to explore the link between trading and psychology. First of all, why does this link exist? We have already mentioned one reason. The trader, no matter how expert or successful, is human and remains so regardless of everything. They are therefore subject to the dynamics of the human psyche. After all, why shouldn't they be? The second reason, which is perhaps more important and less obvious, has more to do with the dynamics of trading. The truth is that online trading, regardless of how profitable it can be, is always a stressful activity. In some cases, extremely stressful. The fact is that it's one of the few human activities where there is always something at stake, which can certainly vary from a quantitative point of view, but whose presence is constant. In short, there is always the risk of losing money. Added to this is the risk of making mistakes, which given the unpredictability and complexity of the market, is always at high levels. A risk that must be faced with a strong decision-making ability, and frequently at that. In short, the pressure is enormous, and this creates psychological imbalances. Imbalances that in turn give rise to even more particular dynamics, which concern specific situations, such as those we will discuss shortly.

What happens if you ignore the psychological aspect

Those who have been trading for some time know perfectly well how essential it is to take care of the psychological sphere. They've learned it firsthand, perhaps experiencing what happens if this aspect is completely ignored. The range of consequences is obviously very wide, so here we will describe only three. Two of these, then, concern exactly the situations we set out to explore: winning and losing.

The biggest risk

But what is the biggest risk for those who ignore the psychological aspect? For those who don't try to manage the pressure, acting ahead of time and taking the most suitable precautions to avoid being overwhelmed? Well, the risk is reaching the most classic of psychological breakdowns, moreover at the most dangerous moment, which coincides with that of maximum stress. That is, in the midst of a complicated operation, when the market is behaving in a way opposite to what the analyses suggest (right or wrong as they may be). At this point, many things could happen. For example, the trader could be gripped by extreme fear, and freeze without moving forward or backward, without exiting the market (if they have an open position) and without entering it (problematic, if in reality the market at that moment presents unexpected opportunities). In the worst case, traders act on impulse, perhaps following a fear or negative feeling, jeopardizing their capital with gestures that, in a lucid state, they would never have made.

In case of victory

But what are the psychological risks in case of victory and defeat? At the beginning of the article we set out to address these two situations, so antithetical. Let's start with victory. Well, in this case, it's possible to develop feelings that are positive in the immediate term, but actually lead to negative consequences. The reference, for example, is to excessive self-confidence, or even euphoria. In this case, it's likely that the trader begins to underestimate risks, to behave recklessly. The consequences of this attitude are easily predictable.

In case of defeat

In case of defeat, it's possible to develop feelings of fear and self-doubt. The trader no longer feels able to cope with the market, sees dangers everywhere. Therefore, they get lost in immobility, letting one opportunity after another for profit pass by. Maybe when they do move, they do it by repeating the same actions over and over again, even unjustifiably, for fear of making mistakes. So they miss one train after another, and therefore money.

How to react in case of victory

Here we come to the advice, but only relating to the situations we have just described. Let's start with victory, which generates feelings and emotions that are only apparently positive, but actually capable of causing bad consequences, for the psychological sphere (the landing hurts more when you fall from high up) and for the wallet.

Don't go beyond your plan

When things start going the right way, a sort of sense of omnipotence can emerge or, more simply, a change in perception: the market, which before was an entity that offers opportunities and risks, becomes a place of only opportunities. So, the trader acts with less caution, underestimating the dangers. The consequence, at an operational level, is excessive confidence, which leads to improvised actions, in derogation of one's plan. A dangerous attitude, since navigating by sight, when the sea is rough (and in the market it always is) is the best way to shipwreck.

Don't believe that the next victory is a given

This is also a consequence of lowering one's guard. This thought often emerges in traders who, for one reason or another (that is, by skill or luck) have managed to hit a streak, to score one trade after another. The feeling arises that the next trade will also prove to be a winner, and the next one as well. Therefore, no precautions are taken to contain the effects of a possible defeat, thus seen as a remote eventuality, at least unconsciously. One operates therefore without the necessary support of money management. What happens in these cases? Well, a lot of capital is lost at the first defeat. So, take stock, review your thoughts. If this dangerous thought pops up, recognize it as a vulnerability and chase it away.

Don't increase exposure

This is also a consequence of thinking that "everything will be fine". If this thought matures, why not strike while the iron is hot? Why not increase investments, even if this causes a deviation from one's plan and money management strategy? Maybe, you could also use a higher financial leverage… The consequences of this attitude are almost obvious. The advice, therefore, is to never increase exposure, if this deviation is not foreseen by your trading plan, even if you have the perception that the next trade will go as well as the previous ones.

How to react in case of defeat

Below we talk about the other "particular" situation: defeat. The secret here, it's good to anticipate, is to transform the negative event into a resource, both by working on one's perception and, effectively, taking advantage of something negative. The proverb "every cloud has a silver lining" can be applied almost everywhere, even in trading. However, it must be done methodically, by implementing precise measures. Here is some advice to achieve this seemingly ambitious goal.

Internalize defeat as a natural event

Digesting a defeat, or maybe a series of defeats, can be tough. Often, the disappointment is so searing that it leaves nothing but a bitter taste in your mouth, emptying the trader of their energy. How to metabolize negative events and start again? The only possibility is to internalize defeat as if it were a natural event. In fact it is, in trading as in life. It's just difficult to realize it and come to terms with this unpleasant truth. You need to do work on yourself, which can also have psychological implications. In a sense, it's a job that does you good always and in any case, even in everyday life.

Retrace your steps

But there is also something "technical" and operational that can be put in place to manage a defeat. For example, studying your behavior, retracing your steps and understanding what the mistake was. This good practice generates two positive effects. From a technical point of view, it allows you to understand the mistake, so as not to repeat it and decrease the risk of losing again. From a psychological point of view, it gives the trader the feeling of having things under control, and allows them to insert the negative event into a growth path, or into a path that does not necessarily lack a happy ending.

Protect yourself with good money management

The best way to manage a negative event is… To do everything possible so that it doesn't happen again. The feeling of having done everything possible so that it doesn't repeat itself is beneficial in itself. Now, it's impossible to avoid losing in Forex Trading. The game, as all experts know, is played on the ratio between defeats and victories, but it's practically impossible to always win. However, if by negative event we don't mean a simple defeat, but the substantial loss of capital following the defeat, things change. This eventuality can be avoided. How? Simple, through good money management, which starts first and foremost from reasoning about one's limits.

Don't immediately change your plan

The tendency is to question everything when suffering the effects of a big loss. The trader, perhaps frightened, certainly lacking confidence, feels the need to revolutionize the trading plan. If doing something, not sitting idle, is always a positive attitude; the same cannot be said for hasty decisions. And the sudden modification of the plan is a hasty decision. A couple of defeats are not enough, however big and invalidating, to reveal that the plan is a failure, and therefore needs to be changed. Before taking this measure, which can be defined without ifs and buts as extreme, tight checks must be carried out, over the medium term. So, think twice before revolutionizing your trading plan.