One of Warren Buffet quotes says, “Failure comes from ego, greed, envy, fear, imitation. I am smart not because I am smart but because I am rational.”
If you want to be successful in any business, you must be logical in your approach. Forex trading is no exception since success needs discipline, expertise, and patience. To become a great forex trader, some may tell you that you must have trading strategies that will offer you the necessary analysis.
However, psychology is the most crucial factor in ensuring that you use your trading tactics with confidence, consistency, and discipline. The mind is indeed your most valuable trading asset, but it can be your most fear-inducing liability as well. It is an incredible power that you can utilize to your advantage or one that can quickly put an end to what could have been a good run.
Fear and greed are two contrasting psychological states, and they are significant motivators with a considerable impact on our lives. They are also unavoidable conditions in forex trading unless you are a robot. Fear and greed can affect the forex trading performance of anyone irrespective of their trading skills.
However, it is much of a struggle for novices more than for experienced traders because they might be too eager to reach their goals far too quickly, thus preventing them from keeping their emotions under control.
Greed is a desire to have more of anything, such as material things. On the other hand, fear is an adverse emotional reaction triggered by an imaginary threat of something wrong happening, such as loss, harm, or injury. In forex trading, greed inflates liquidity in the currency market, which pushes prices higher up, with the selling starting only after the more prominent foreign exchange traders start trading.
Forex traders display greed by looking at their open profits and calculating the gains achieved so far. If they are happy with the payments, they start figuring how much more they could add to what they already have if they extend the time for the trade to stay open. Open profit indicates that any trade transactions you make will not earn you any profits until after the complete close of the position.
If a profitable position does not exhibit an exit, the only thing you will have in your trading account balance is the potential of a profit and nothing else. Many forex traders, especially those new in the currency exchange market, do not know the difference between secure and open profit.
Therefore, they engage in trading behaviors that include changing the objective of their initial profit, driving it away just as the price approaches. The result of this greed is that the traders that do this do not get their initial profit target, but instead, they end up with a much smaller gain.
Whilst an increase in market prices portrays greed, the opposite is true about fear. A decrease in the same represents the fear of losing control of the currency market. As per the concept of some traders, prices increase due to greed and fall due to fear. The risk of losing money leads to anxiety, which can turn into positivity or a detrimental result. It plays to your advantage because you might end-setting stop losses on your transactions, saving you the loss of your trading account.
On the other hand, fear can become a liability. Consider the following scenario: you decide not to enter a decent trade setup with an attractive price action merely because of the extreme fear of losing money, possibly because of recent streaks of poor trading results. Furthermore, after risking a substantial amount of money in a trade and losing afterwards, you will tend to get fear out of using the same amount of money for your future transactions.
Greed and fear are incredibly potent factors in forex trading that affect all forex traders, even the most seasoned experts. However, they are both psychological emotions that you can easily control with discipline, consistency, and knowledge about forex trading. Before you start actual forex trading, you should practice with a demo account until you are sure you can work on your emotions for successful trading.