Trading forex is an inherently risky activity. It is one where your outcomes hinge on a combination of skill and luck.
One concept in psychology that may help you better understand your attitudes toward risk is what is called your “locus of control.”
In this post, we will explain exactly what your locus of control is, how you can identify it, and what it can mean for you as you are trading FX.
What is a Locus of Control?
Your locus of control is measured along a scale from internal to external.
- If you have a high internal locus of control, you believe you are largely able to control your own destiny.
- If you have a high external locus of control, you believe forces you do not control determine your destiny.
Commonly, one’s locus of control will rest somewhere between these polar extremes. But it is likely more toward one side than the other than perfectly balanced.
How Can You Discover Your Locus of Control?
One way you can figure out what your own locus of control is would be to take this assessment.
It is worth taking the assessment even if you think you already know the answer. You might be surprised to find your locus of control is more internal or external than you believed.
After you add up your score, be sure to read the section on interpretation. It explains that an average score is between 9 and 16. A score below 9 is a strong internal locus of control, and a score above 16 is a strong external locus of control.
What Impact Does Your Locus of Control Have on You as You Trade?
Now that you have had a chance to assess your locus of control, let’s talk about the impact it can have on you while you are trading forex.
If you have a strong internal locus of control …
- You have an easy time believing that you can exert significant influence on your trade outcomes by using your trading method and following the rules you have tested.
- Likewise, you have an easy time believing that you can succeed as a forex trader if you put in the effort.
- Taking a risk may not scare you much, because you feel you can stack the deck in your favor.
- When you win trades, you probably will take pride in doing so, acknowledging the role your skill and effort played.
- You may more readily accept responsibility for your mistakes and your losses.
- You may feel more resilient in the face of challenges and have an easier time “bouncing back” when you lose.
While all of the above are great for forex traders, there is one possible drawback of a strong internal locus of control:
- Sometimes, you might think you have an unrealistic amount of control. At that point, you may believe you can do no wrong. Instead of possessing confidence, you possess hubris.
If you have a strong external locus of control …
- It may be hard for you to trust your trading method, even if you have tested it and proven it works.
- You might have a hard time believing you can make it as a forex trader, even if you have the skills and the knowledge to do it.
- When you win trades, you may feel like you just got lucky, even if your skill was critical.
- When you lose trades, you may be more likely to offload responsibility (i.e. blame bad luck, your broker, etc.).
- You may have a hard time managing your emotions when things go wrong. Since you feel you have little control, you may always feel like you are wading through confusion and uncertainty.
- If you are on a losing streak, you might struggle to put in the effort to fix it, believing nothing you do will help.
- It might be really scary and hard for you to take risks.
Despite all these negatives, a strong external locus of control does offer the following advantages:
- You are less likely to credit yourself for victories that are truly due to luck or blame yourself in similar situations.
- It is more likely that you will be realistic in general about the ups and downs involved in forex trading and the rocky road to success.
What is Ideal?
Given the pros and cons we went over above, you can see that on the whole, it can be beneficial if your locus of control is closer to the internal end of the spectrum than the external end.
But since there are still some drawbacks to an extremely internal locus of control and a couple of benefits to one that is more external, it is also important to have some balance.
Realistically, the objective truth lies between the two extremes. We can exert some degree of control over our destinies by making smart decisions that help to mitigate our risk as we trade. But it is folly to think that we can ever completely escape the influence of chance.
When we proceed with that balanced and realistic view, we are able to make trading decisions that minimize—though never fully eliminate—our losses. That is the key to forex victory.