Aside from the risk of losing money, forex trading also involves several psychological risks. These risks are often overlooked by beginner and expert traders alike, which exposes their trading capital and psyche to potential damage later on.
This article will discuss the most common psychological risks faced by forex traders.
Psychological Risks in Trading
The first of these forex trading psychological risks is that of getting bored. This may sound counterintuitive as the forex market presents a lot of market catalysts and price movements.
However, it’s this continuous stream of possibilities and activities that could lead a bored trader to make bad trade decisions.
For one thing, the lack of profitable or triggered trades on one’s forex account could lead a trader to overtrade by forcing some setups just to be able to actually take a trade and have a chance at catching profits.
A trader might tell himself that there are plenty of opportunities out there and he has to take every single one of them.
The problem with this is that the trader could become extremely bent on just taking a setup or multiple setups without regard for its validity.
Another of the psychological risk in trading is that of being overconfident. This usually takes place when a trader has won consecutive trades, leading him to think that he has completely mastered the markets and is sure to win his next trades.
This can tempt a trader to double his risk or increase his position size dramatically, which can be damaging to a trading account, especially when the market environment starts to shift.
In addition, having a losing streak after a period of being overconfident can be rocky on one’s trading psychology.
Lastly, there is also the risk of recency bias. This goes both ways, as a trader tends to get affected by his most recent trades.
In particular, a trader undergoing a losing streak can be less confident in his analytical skills. This can lead him to question his trade strategy entirely and make adjustments out of context.
On the other hand, a trader that’s too focused on his winning trades could wind up being deluded.
To keep these psychological risks from damaging your forex trading account, make sure you note your decision-making process and thoughts in your trade journal, along with the profit or loss and trade analysis.
Only then can you identify if you’re falling prey to such risks and remind yourself to stay level-headed.