The psychological impacts that affect a forex trader's performance are greed and fear, whether you are a forex newbie or an experienced guru. Psychology also plays a very important part of each individual trader’s quest for long-term trading profitability. A trader’s mind is both his prime asset as well as his greatest liability, it is a force which is either able to be used to advantage or one which will undermine a trader.
Financial trading involves a tremendous amount of knowledge, patience, and discipline. As humans, we are rather emotional creatures vulnerable to make mistakes. A trader must present cold-blooded analysis and implementation of the trading strategy. Trading psychology is highly important to ensure that all trading decisions are made with discipline, confidence, and consistency. Sticking to your system for any length of time is nearly impossible without having sufficient trust in your trading ability.
Controlling our emotions during our trading is perhaps the toughest obstacle we face in making our goals a reality. Rising prices are an illustration of greed in the markets and when prices are falling, we are seeing the picture of fear taking over. Greed causes prices to rally and fear causes them to fall…or so they say. Greed and fear are very strong forces in forex trading that impact all forex traders, even the most seasoned ones.
Greed often manifests as looking at your open profit on a trade and thinking about how much you have made and about how much more you ‘could’ make by keeping the trade open. Open profit is just that, and you have not secured any profit from a trade until the position is closed. Unless you have closed a profitable position out, you really have nothing but the potential for profit. Ignoring the fact that open profit is much different than secured profit is the root cause of why traders do things like move their original profit target further away as price approaches it, which typically results in a much smaller profit than their original target would have brought them.
Fear of losing money can be both good and bad, you just need to find the right balance and not have too much fear. Fear of blowing out your trading account will cause you to place stop losses on all your trades, thus, in this regard, fear is good for the trader. But, fear can work against us too, by causing us to not enter a good price action trade setup only because we are afraid of losing money, perhaps because we have just had a series of losing trades. The other main reason traders become afraid to trade is because they have been risking too much money per trade and have just lost more than they can stomach.