The Psychological Forex Trader: In the trading world we are told that there are two types of traders: The fundamental trader, and the technical trader. The fundamental trader uses news, world economic events and speculation to form their bias, and to execute their trades. Fundamental trading is the oldest form of trading. In the late 1970’s came the introduction of technical trading. The technical trader uses charts, usually Japanese candlestick data in hand with indicators, to form their bias and to execute their trades. Technical trading allows for an infinite number of opportunities to participate in the market. Traders are able identify a number of behavioral patterns in their chart data. While having an infinite number of opportunities can be seen as a positive, it can has its’ negative implications as well. The limitless nature of technical trading can lead to information overload, confusion, and ultimately trade paralysis. How does one avoid these pitfalls? How does the trader go from simply analyzing technicals, to proficiently trading the market? A extraordinary level of discernment is required.

In the trading world we are told that there are two types of traders:

(1) The fundamental trader traditionally uses news, world economic events and speculation to form their bias and to execute their trades accordingly.

(2) The technical trader who came to prominence in the late 1970s uses charts and usually Japanese candlestick data in hand with indicators to form their bias and to execute their trades thereafter. Technical trading allows for an infinite number of opportunities to participate in the market. Thus, traders are able identify a multitude of behavioral patterns in their chart data. 

Whilst having an infinite number of opportunities can be seen as a positive, it can have negative implications as well. The limitless nature of technical trading can lead to information overload, confusion and ultimately trade paralysis. How does one avoid these pitfalls? How does the trader go from simply analyzing technicals, to proficiently trading the market? An extraordinary level of discernment is required.

However, there is a third type of trader that is rarely discussed. I call this individual The Psychological Trader. Psychology is the study of human behavior and mind. Being a psychological trader requires viewing the market as a collection of human emotions and behaviors instead of candles and trendlines. One must have a deep understanding of human behavior and mob mentality, as well as market structure in order to call themselves a psychological trader.

The Psychological Forex Trader combines fundamentals and technicals, along with any other form of intel he/she can gain in order to come to a logical and accurate assessment of the market. Why is this so? This places the individual at an advantage as he/she is no longer simply reacting to news propaganda and candlestick formations. This type of trader is able to take a step back from the hysteria that is the market and see it for what it truly is: human behavior.

Major financial institutions otherwise known as market makers are well aware of how the masses act and react to certain scenarios and market conditions. They will in fact purposefully create a synthetic problem in the market to ultimately illicit a desired outcome. Once the masses have reacted accordingly, the market maker will provide the solution to this synthetic problem. This is known as Hegelian Dialectic (problem>reaction>solution) and is the oldest trick in their playbook. Hegelian Dialectic has been applied to nearly every institution known to man from political, religious and financial intuitions. It is your objective as a psychological trader to not fall into this cycle. Instead, your mission is to reverse engineer the market and the manipulation placed upon it. This is where one goes from trading with the retail herd, to trading in line with the market maker.

 

A trader that approaches the market from a human behavioral standpoint will always be at an advantage. While the public is reacting in fear or greed, they are able to view things from a holistic vantage point. They are unable to see the forest for the trees.

Mark Douglas defines the concept of mental analysis in his book ‘Trading In The Zone’. In it, he describes an individual who is able to trade clearly without their emotions taking over. This trader is able to not only see what is going on in the market, but is also able to identify what is happening within themselves. This is how the psychological gap is filled and a trader can go from contemplating what will happen in the market to successfully trading their speculations.

As traders, we have all gone through the emotional rollercoaster from joy to pain and elation to agony. Becoming a psychological trader is a two part process. Your objective is to:



  1. Remove the emotional response from your trading.
  2. Instead react to the emotional responses of the masses.

Once you are able to consistently operate from an emotionally free state of mind, financial freedom will follow.  As the great Jermaine Cole once stated “free your mind and everything will follow”.

The Psychological Forex Trader by Elwin.