Psychology Behind Forex Trading: PANIC

Fourth Demon: Panic

According to the rule of trading – “The gain of one person is the loss of someone” which means if a trader is winning a large sum of money in a short trade, another trader is losing an enormous amount in a long trade. Research has shown that whenever a trader thinks about it, he goes into a state of panic. He starts thinking that he is the one who will always be at a loss and there is no way he can make profits in the forex market. You can say that panic is just the opposite of euphoria (where traders see just profit and nothing else).

Panic grips everybody at some point or the other whether a trader is an experienced one or a beginner. This happens mostly when the markets are most volatile which pushes him to take wrong decisions in a state of panic. At the time of market volatility, the price fluctuates more rapidly as compared to when the markets are in normal mode. At this time, even the experienced and practiced traders’ loose confidence in their predictions and start panicking.

Under the state of panic, the trader closes the position thinking that the price can reverse anytime. This leads to the booking of lesser profits and even losses in the long run. He even misses the possible signals for opening or closing the trade and unable to interpret the analysis done. The ultimate test of success or failure of a trader is the market. However, for a trader in panic, it is not so; he may have all kinds of presumptions, delusive expectations and imaginary benchmarks that he may use to define success.

Overleveraging tends to amplify the damage caused by panic, and various stop loss triggers amplify this scenario even more.

Closing Thoughts

To deal with such psychology, it is important to understand that emotions or luck does not make or break the position in the market. Profits and losses are all dependent on the analytic study and logic. A string of losing trade is never the consequence of luck or chance. It is all because of half-knowledge plus emotions. And the trader becomes vulnerable to these emotions when he leverages a position in the forex market, but it all depends on him how he wants to control the account.

Whatever is said and done; the best ways to deal with the four demons of psychology is by studying the economy and understand what moves the markets up and down. However, traders mostly concentrate on the technical analysis while learning, but I recommend that you should pick up an economics newspaper on a daily basis if you want to keep control on your emotions as well as to be a successful trader.

Written by