Forex psychology

Forex psychology

Forex (or trading) psychology is very difficult but at the same time very important and interesting for study.

As every successful Forex trader knows, it is not enough just to have the technical knowhow of the actual mechanics of trading the Forex (foreign currency exchange) market, but to recognise that to be a winner relies also on the psychology of trading – Forex requires mental discipline.

While the aim is to capture as many Pips (Price Interest Points) as possible, in order to make your profit, your head needs to rule your heart in Forex trading. Don’t get carried away by the thrill and excitement of the moment! Have a plan or strategy in place before you start trading, and predetermine your exit point.

Within the Forex trading experience, you will have losing trades (every Forex trader does). But the art is in knowing when to let go of these, and not hang on in the hope that they will turn around and start making money. Don’t keep lowering your stop-loss order in anticipation of an upturn in the market that may not come for some while, and don’t persist just to try and prove yourself right! Smart traders know there will always be another trade along soon. Equally, know also when to exit from profitable trades.

A golden rule is always to place a stop-loss order, along with every entry order, to prevent any loss from sinking too far. Anyone who doesn’t place a stop-loss order is going to lose probably a lot of money. An acknowledged maxim is to cut your losers, but let your winners ride.

Apply discipline and emotional control when trading, and follow the rules. Try not to be too greedy. While it is great to be passionate about what you do, patience can be a virtue when Forex is concerned. Don’t let your emotions hold sway, and resist the urge to gamble! Have the courage to stick with your plan and stay with the rules. Believe in yourself for that winning system.

Most of all, gain an understanding of the charts, for they represent so much and are relatively easy to interpret and use. Forex trading develops strong trends, and although a more volatile market, predictability is one of the advantages of this market over others such as futures and stocks. Technical analysis is the most precise way of trading Forex, with charts showing the historical data, which over time has patterns repeating themselves, and can be used reliably for predicting future trends.

The key, of course, is recognising these price patterns to know when to place orders in present-day trading. Research has shown that those who trade ‘with the trend’ improve their chances of success. Don’t cloud your mind with non-essentials such as wondering about the reasons for price movements. In other words, if the market trends show your judgement to be correct, stay with the market for the maximum gain, according to your own risk-to-profit boundaries. If the market starts to go against you, take your profits and get out.

It is wise to open a demo account and to practise trading ‘on paper’ first before risking your money. If you’re unsuccessful in this, it is unlikely that you will suddenly become an expert trader in a ‘live’ account, when using your own finances adds to the pressure to succeed. Never risk more money than you can afford to lose.

Elements of a Successful Forex Trade

Elements of a Successful Forex Trade

Courage Under Stressful Conditions When the Outcome is Uncertain

by Jimmy Young of EURUSDTrader

All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.

You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful forex trader.

However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you're taking.

Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We believe we can help you correct deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.

Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.

For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a 'hold on until it comes back' strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.

The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).

So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.

Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?

If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.

Patience to Gain Knowledge through Study and Focus

Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1. It's also good to know how currencies relate to each other. There are tools like the universal currency converter that make it easy to do this for you.

To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.