This article looks at the most well-known psychological errors seen on the FX rates exchange market.
Approximately 90% of all FX rates traders will experience one detrimental loss during the foreign exchange trading career. This loss can be due to technical faults, unforeseen market swings or psychological mistakes. It is important you are aware of all these factors as any can be encountered when trading. This article will examine the most common mental mistakes, as well as provide advice on how to overcome them.
The FX rates mob mentality
Forex trading is often about mob mentality when following a trend movement. However, there are times when a mob mentality is not actually good for your trading. When you blindly follow a group decision you can made serious mistakes which lead to losses. This is most commonly seen when social trading is considered. Social trading is looking at forums and other forex groups to find information about the market. Many new traders take what the more experienced traders say as law and blindly follow.
To avoid this you should never consider tips as indicators or signals to trade. You need to complete your own analysis based on these tips and rumours before you follow any trends. You also need to confirm the information source to verify that it is legitimate.
There are a lot of mistakes that can be made when trading and some of them deal with your mentality. To avoid these mistakes you should always complete your own market analysis, but you should not become too confident in what you are doing. When you look at confirmation data also look for conflicting data to ensure you are heading in the right direction.
The confirmation bias
The majority of traders want to validate their information or analysis. While this is a good thing the problem arises when traders only look for information that confirms their analysis. You have to look for information that contradicts it as well. It is only through having both sides of the story that you can make a profitable trade. The only way to overcome this is to take the time to train yourself to look for the conflicting information.
Another problem with confirmation bias is that traders only see the parts that confirm what they want. Many traders look at an expert analysis of a situation and only look for the points that confirm what they were thinking and completely ignore all the other points. This mental mistake can only be overcome by taking the time to read all of the information you have.
The error of over-confidence
When you have done your research and analysis it is good to be confident in what you are doing. If you are not then you will second guess yourself and could end up making an emotional trade. Of course, you should not become overconfident in what you are doing. Over-confidence is a problem with many traders who have had a run of successful trades. These traders believe that they know exactly what they are doing, and sometimes they do. However, when they become over-confident they could take short cuts in their analysis which ultimately results in bad trades.
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