Behavioural finance seeks to combine behavioural and cognitive psychological theories with conventional economics and finance to understand what drives investors to make irrational decisions.
Following a trading plan without bending any rules is easier said than done. Here are a few reasons why most traders have trouble sticking to their trading plan.
Having a good strategy is not enough to make money in the forex market. When two traders use exactly the same trading strategy, they will usually end up with different or opposite results. This difference is due to the psychology of traders, as each trader tends to think differently.
The forex trader's attitude is an important element that must not be neglected. In order for a trader to elaborate a trading style that matches his mindset, he or she must identify his or her key personality traits.
In forex trading, creativity and the desire to take risks increase exponentially during winning streaks. However, this is generally not the case when your hard work and the time you've invested lead to losses instead of profits. Stress and the taking of unnecessary risks are frequent side effects after a series of losing forex trades.
One of the biggest challenges you'll face in your quest to becoming a profitable forex trader is maintaining objectivity while trading. While there are many factors which contribute to your loss of objectivity in a given situation, there is a clear and defined path you can follow to regain it.
Most beginners who switch from a demo account to a real account generally think that their results in demo mode can easily be replicated with a real account. Due to this, some traders give up when they realise that this is not always the case. Here are some reasons:
This diagram represents all of the psychological reactions that a trader or investor can feel when observing the evolution of prices. As embarrassing as it is to admit, we've all been there!