Learn Forex Trading for Professional Traders

Trading for a Living
Lectures 20 Lessons
Duration 20 Hours

Psychology of a Forex Trader Explained

Perhaps one of the biggest enemies in Forex trading is the trader’s emotional state. One never knows how he/she will react under pressure of winning or losing a substantial amount of money.

Usually, a trade is born from a conviction. Either technical or fundamental, a reason exists behind buying or selling in Forex trading.

From the moment a trade is open, the emotional rollercoaster begins. When in profit, the trader starts doubting the validity of the reasoning process. Questions like:

  • What if I’m wrong?
  • This is random, can it happen?

Such thoughts dominate the thinking.

When in the loss, traders tend to hold longer to trades. Human nature makes us vulnerable to terrible trading decisions.

Make no mistake; every Forex trader will experience an avalanche of sentiments from the moment a trade is opened. Because the markets swing often, they often go against the trade after entry most of the time. Coping with such a situation is a challenging task.

Sometimes, the market stays irrational for so long that the trader quits. He/she closes the position in despair, only to see the market turning to the potential take profit.

For this reason, market psychology and the trader’s psychology are critical to success in Forex trading. Emotions like greed and fear, but also regret, influence the trading process.

Because the market is made of all traders’ decisions, then the market expresses the greed, fears, and regrets of all participants. Even the trading algorithms (robots, bots, expert advisors, etc.) are programmed by human beings, so the sentiment exists there too.

Pessimism and Optimism in Financial Markets

Many theories tried to connect pessimism and optimism and link the two in such a way as to justify a trade. Ralph Elliott built the famous Elliott Waves Theory on market psychology principles.

He documented patterns following the Newtons’ action and reaction principle applied to human nature. For every action, there’s a similar reaction.

The resulting impulsive and corrective waves formed cycles of various degrees according to the trading style and expectations of market participants. Cycles of smaller degrees refer to the scalpers (traders that keep positions open for short periods and target small profits) actions, ones of a bigger degree to scalpers and swing traders, and so on.

So what Elliott did was to put himself in the shoes of a trader, to understand the pitfalls of trading. In short, he used empathy to build one of the most powerful trading theories that exist. He even claimed that the theory incorporates the human sentiments of pessimism and optimism. From that moment on, crowd behavior appears constantly in the attempts to understand financial markets.

Others tried to interpret market behavior in a similar fashion. Harmonic trading for instance, was born on the original idea of Gartley that the crowd reacts after a series of lower lows or higher highs ends.

Technical analysis is full of trading theories aiming to explain the human sentiment. But for a trader, the emotional roller coaster never stops. The thing to do is to get used to the speed and challenges of Forex trading and see if you are cut for the job.

The excessive desire to accumulate wealth is called greed. One of the biggest pitfalls in Forex trading is to handle it.

Greed is difficult to handle for a simple reason. Traders come to the Forex market to make a quick buck.

Next, they build a trading strategy and system that results in a trade. Long or short, it doesn’t matter, as long as the trader is right about the direction.

But then, they need to decide on how much to buy or sell. This relates directly to how much traders stand to gain from the trade.

Greed leads to excessive volume. Just because the market created two of three or more similar moves in the past, doesn’t mean it’ll do the same with the next one. However, greed leads to excessive volume, and typically losses result from it.

Greed leads to overtrading too. Overtrading in Forex trading refers to the opening of multiple positions in the same direction.

Traders may not even realize what they are doing until it is too late. For instance, when the NFP (Non-Farm Payrolls) or other important U.S. economic data comes out, the USD rallies or falls across the entire Forex dashboard.

If a trader has a long position on the EURUSD pair, for example, the temptation grows to buy GBPUSD too. Or, AUDUSD, NZDUSD, and so on. In the end, while taking four different trades, it is like taking four trades on the same currency pair. A small turn and the account is burning.

Obviously, fear is the opposite of greed. In Forex trading, fear is a costly feeling. More precisely, the opportunity cost increases when fear is present.

Either being too afraid to take the trade, the trader ends up sitting on the sidelines when the most powerful trends run. Or being too afraid to pull the plug on a losing trade, the trader removes the stop loss or even ads to a losing position.

Regret, on the other hand, is more difficult to quantify. What happens is that traders have the tendency to close winning trades early and let losses run.

This is why one of the best saying in trading goes like this: let your profits run and cut your losses short.

When traders take profit prematurely, and the market keeps going in the original direction, they start feeling sorry for what they did. Soon, they jump in the trade again.

However, the market moved in the meantime and levels changed. That could end up in the wrong way, so having remorse in Forex trading shouldn’t be something allowed to guide a trader’s decisions.


The emotional rollercoaster is the problematic part of the trading job. Anyone can learn how to trade by investing in trading education.

What no one can teach a trader is how to handle the emotions. Everything written in this article shouldn’t come as a surprise to any trader.

Yet, traders react differently. That is because the capital involved means something unique for every trader.

The best money managers in the world aren’t hired and paid only for their knowledge about financial markets. Instead, their trading abilities are worth much more.

Among the most important, how a trader handles pressure makes the difference between winning or losing in financial markets. And the market will test a trader constantly.

All in all, constantly making a profit in Forex trading requires a mix between knowledge and understanding market psychology. Even after mastering market analysis, if ever, the trader needs to fight the biggest enemy in the way of their success: their own fears, regrets, and greed.