Forex trading does require a lot of planning and critical thinking along with detailed analysis of the market situation. Those who master the art of rational thinking will be able to attain trading success with ease. But thinking too much and being unable to come to a conclusion is also common among forex traders as we are always worried about the end results. This habit of overthinking can limit your potential and have a negative impact on your trading performance. Sometimes overthinking can be just as bad as taking an action without much thought. Impulsiveness in trading often leads to costly mistakes and overthinking, on the other hand, it affects our ability to make timely decisions.
If this is something you struggle with as a trader, then this article can be an insightful read as I am about to share some valuable tips that can help you stop overthinking during the trading process.
Difference Between Thinking and Overthinking
In order to stop yourself from overthinking, you need to understand the difference between thinking and overthinking. Because most of the time, we don’t intend to overthink something and it is just that we don’t realize that we have started overthinking instead of thinking. Thinking is the act of contemplating a decision based on the possible outcomes and that helps us to choose the best course of action before doing something. The human mind is very powerful as we can think about a situation from different perspectives, weighing all the pros and cons.
This ability helps us to avoid any dangerous scenarios as our brain is wired to warn us about any threats in advance and keep us safe all the time. However, this can often turn into excess worry and anxiety, which is often the root cause of overthinking. In critical or analytical thinking, you are just looking at the facts and figures to make a logical decision. But overthinking is always focused on the negatives as we tend to delay a decision due to self-doubt. Lack of confidence in your skills and abilities can also lead to overthinking.
Pessimists are more likely to overthink in comparison to those who are neutral or optimistic.
For instance, when you are a new trader, you will be using a demo account, which looks and works just like a live trading account where you can test your strategy and evaluate the results without any risk. Many traders tend to feel confident after getting expected results on a demo account but when they switch to a live account, they will get anxious and even experience analysis paralysis while trying to place trades.
There is only a thin line between thinking and overthinking and there are some signs that you need to watch out for preventing overthinking.
Signs of overthinking
- Having too many thoughts that distract you from paying attention to what you are doing.
- Being indecisive and thinking a lot even while making small decisions.
- Experiencing a lot of stress and poor trading performance.
- Being unable to stay calm or relaxed and even struggling to fall asleep.
- Planning too much that you are unable to take action due to fear.
- Mental blocks that lead to poor trading decisions.
Types Of Overthinking and Tips to Manage Them as a Trader
Overthinking after a failure
This is something that all of us experience from time to time. Once we encounter a loss in trading, we will always be fearful of another loss. Our past experiences do play a role in shaping our beliefs and our brain will be trying to avoid another negative experience and will do everything to prevent that. This makes us overthink every action that we are going to take as we want to ensure success. Many traders don’t even take action as they keep thinking about the loss for a long period of time. They are just not ready to accept the losses and fail to move on.
Although it is good to take a break from trading after you encounter several losses in a row, this does not mean that you should waste a lot of your valuable time dwelling on something that has already happened. Because it often leads to limiting beliefs as we are afraid to lose more. Some traders even think about quitting trading as a whole after a loss as they fear that they will lose all of their money by continuing to trade. But that will never happen if you have a sound risk management plan to secure the trading capital and you are just being irrational due to fear.
Tips to Manage
- Keep track of all your trades with a trading journal and use it for evaluating your performance. This way, you won’t be repeating the same mistake again and this gives you confidence.
- Adopt a growth mindset and look at the positive side instead of being too fixated on the negatives. Think about how you can do better next time and how the setback was an opportunity to learn from your mistake.
Overthinking about things that are beyond your control
When it comes to forex trading, there are many aspects that a trader can control but there are also some factors that are outside your control. For instance, the stop loss and take profit levels for a trade can be decided and controlled by a trader. You can use tools like trading calculators to accurately obtain values for making informed trading decisions without any delay. But we don’t have any control over economic events or political issues that affect the currency pair prices and overthinking about the possibility of such events will not help much in the trading process.
Uncertainty and risk will always be there when you are executing trades in the forex market but over analysing a situation is not going to provide any viable solution. It will only make you stressed and indecisive as you start thinking about all the ways in which things can go wrong. Sometimes, you just have to go with the flow and let things happen the way they are supposed to happen. Trying to control every situation is not practical or possible for a forex trader. You can control the amount of risk that you are taking but the end result will be decided by the market.
Tips to Manage
- Don’t suppress your worries but separate them from the process of making trading decisions. Only focus on the aspects that you can control while watching the market and you can take ample amount of time to worry when you are not trading.
- Interact with other like-minded traders and hear their stories on how they deal with unexpected situations when they happen. You can learn a lot from the experience of other traders.
- Continue learning and practice to develop your skills. This way, you will be prepared to deal with any kind of situation and respond to them like a professional trader instead of being overwhelmed.
Overthinking about the emotions you experience and doubting your abilities
The fear that you feel before placing a trade on a live account is completely normal and when you are a beginner, the fear is going to be even more intense. However, traders tend to overthink the emotions that they commonly experience and even doubt their abilities or skills. This stops them from taking action and sometimes they even let go of good trading opportunities as they are unable to handle the stress. I am not saying that you need to ignore your emotions as they are valid at times.
But most of the time, focusing on these emotions only makes it harder as we fail to think rationally. It would be almost impossible to be emotionless when you are trading manually but it is important that you work on controlling these emotions instead of letting them overpower your mind.
Tips to Manage
- Build self-confidence by gaining more knowledge and polishing your skills. This will help you to overcome self-doubt.
- Move your body and do exercises for stress-management which helps in developing emotional control.
- Use positive self-affirmations to get rid of negative thoughts.
Overthinking during action planning
Do you experience a lot of thoughts suddenly rushing to your mind just before taking an action? It is common to experience this right before placing a trade. Even when you have a sound strategy and trading plan, you will often end up over-analyzing the situation which only leads to confusion. It is good to double-check and confirm your analysis before entering a trade but if you keep doing this for a long time, the opportunity will slip away in the blink of an eye.
In the fast-paced forex market, you need to be a quick decision maker and the analysis paralysis will delay your decisions and actions. Speed and timing are crucial for executing your trades with perfection and when you are spending all of your time planning alone, you won’t be able to take timely action.
Tips to Manage
- Make sure that your strategy is well-defined and simple so that you don’t get confused during market analysis.
- Utilize a demo account to refine your strategy and work on the details.
- Always make decisions after considering the probabilities and this will minimise your concerns.
Being mindful of your thoughts while trading
Our thoughts are very powerful and they often turn out to be self-fulfilling prophecies. That is why, we are told to think positively but when you are trading, you should also consider the risk of making irrational decisions. It is all about striking a balance and you will see yourself becoming better with experience.
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