Psychology is one of the pillars of success in financial markets, money management, and trading strategy. Behavioural finance is also a subject of study for many authors. On a demo trading account, the emotions are not very present since there is no money involved. Your emotional response will increase tenfold on a real account. Then you must have an iron discipline in your trading. Fortunately, there are different ways to control your emotions, to learn to deal with it in your trading. If you want to become a trader, this is an essential step in your learning. Let’s see how Freudian theory sees the motives for irrational human behaviour, including bad trading decisions.
The term “motivation” has the Latin origin “motivus”, which suggests movement. The study of motivation consists of analyzing the direction and intensity of behaviour. According to psychoanalytic theory, all behaviour is determined by a small number of physiological impulses. It wasn’t until the 1950s that researchers demonstrated that motivation was more determined by physiological needs.
Freudian motivation theory makes part of his fascinating personality theory, which impacted many human activity fields, including trading. His personality theory recognizes three aspects of human nature which Freud described as Id, Ego, and Superego. The first one represents unconscious life and the thoughts of every human being. Ego comprehends our conscious needs and thoughts whilst Superego aspires towards the ultimate moral and ethical standards.
Our emotional responses to reality are based on these three aspects of personality. We make our decisions and react to external events depending on which aspect of our personality is dominating. The primitive impulses and needs are defined by Id or subconscious part of ourselves. These needs are mainly physical. We usually perceive them as the needs that have to be satisfied as soon as possible to put our body and mind in balance.
As applied to some modern types of human behaviour, it can be associated with compulsive shopping, betting, and other addictive behaviours. At this point, we can start grasping the relation between Forex trading and emotional triggers or motivations. When a Forex trader reaches the point of performing trades due to the fear of loss or missing the opportunity, or because of irrational euphoria, it’s all about our subconscious controlling our decisions. And at that very point, we must face this issue to avoid vicious cycles where Forex trading might limit with the betting. Whether it’s compulsive betting or shopping, persons with compulsive disorders must face their inner self and understand the link between their nefast behaviour and their irrational emotions and thoughts. To avoid falling victim of your impatience and impulsiveness, check out the evil ID is not the master of your trading decisions.
Considering all the above said, the role of the Superego part of your personality has to intervene. Therefore, everything here comes down to control yourself. Except if you don’t have a severe compulsive disorder, you will be able to put every thought in light of the field of consciousness. You need to overcome your greed to avoid risk moves leading to losing all your capital in a glimpse of an eye. It would also help if you learned to manage your finances better to avoid stupid decisions based on fear of loss.
Psychology in trading is all about dealing with emotions. It is one of the main causes of losses in trading. The trader’s psychological risks are numerous, and it is essential to be aware of them in your trading. Thus, you must learn to deal with the greed, the fear of losing, the frustration, anger, stress, euphoria, addiction. If you don’t deal with these types of emotions, they take control of your trading. And it inevitably leads to the loss of capital from the misuse of leverage.