When most people start trading, they do not put much thought into their trades.  They will either buy or sell a currency pair (probably the EUR/USD) because they think they see a trend or maybe even because they put a moving average on the chart.  Sometimes there is no reason at all for the trade, they just want in.  Either that trade nets a small profit or the trades starts going against the new trader.  The trader that gets the small profit will feel invincible and likely base trades in the near future on the same reason as the first one.  Of course they expect every trade to win.  The trader whose position moves against them leaves their position open, stares at the their computer without blinking, and laments that they will get out if the market only goes back to break even.

A trading plan is a must.  I would be will to bet that virtually all successful traders have one.  However, most new traders have no plan.  In fact, I bet most new traders barely even have actual reasons for entering a trade.  Imagine that you are planning to loan money to a new business as an investment.  Could you picture yourself lending money to this person if they had no business plan and said they were going to start their business based on "their gut"?  Of course a person would never be able to start a business by relying only on their gut.  However, plenty of new traders start trading in exactly that manner.

Today we will discuss why your results in your demo account will probably contrast sharply with the results in your live account.  When most people start trading, they believe their results trading with fake money will be the same as their results trading with real money.  Of course, that is almost never the case.  The reason for this is that a person's emotions greatly impact their decision making ability when real money is on the line.  We will go over why this is, and we will go over some tips for blurring the line between demo accounts and live accounts.

Let's say you have made a detailed trading plan.  You know the exact criteria or "rules"  you will use to place a trade.  You have a checklist to make sure you follow each of these rules.  You have a money management strategy so you know how much you will risk on each trade, and you know what your risk:reward ratio must be.  You know what time of day you will trade, what time frames you want to look at, and what currency pairs you want to look at.  You have a spreadsheet ready to track each trade for further analysis.

Recency bias may not be a household phrase, but I guarantee that anyone who has ever traded has experienced it.  Recency bias is the tendency for traders to place more importance on more recent trades and to place less importance on less recent trades.  This phenomenon is not limited to trading of course.  Another example would the history of the all star game in Major League Baseball.  If you asked the casual baseball fan who has won more all star games, most people would say the American League because they have not lost since 1996.  However, the National League has actually won 40 games to the American League's 38.

Today I will go over what I think drives price movement in the markets, why I hold these beliefs, and why I think it is important to understand the forces in price movement.  Keep in mind the following theories are my opinions, not absolute fact.  I believe in technical analysis much more than fundamental analysis, which will be reflected in this feature.  There are people out there that will probably disagree with some of my statements below, which is fine.  However, it is my hope that this information will provide value for our readers and at least make people think.

Trading psychology is the most important aspect of a trader's success.  This may surprise some readers, specifically those that are new to trading.  However, the psychological makeup of a trader is more important than market knowledge, market analysis, and even money management.  The reason psychology is so important is that even the best information can be distorted by a poor mindset.