The basics of Forex Trading Psychology
It takes more than just ordinary buying and selling currencies to trade in the forex market. A certain personality is required to be effective and profitable in the highly unstable and ever-changing world of foreign exchange. Factors that derive from the psychology of each individual trader often affect success in trading more than just about anything else.
In addition to having a great trading plan, you must have the trading acumen to put the plan into action and the discipline to stick to it. The psychology of trading is made up by a number of very human elements, and the topmost among them are the emotional responses that people undergo when trading. Generally, giving into such emotional responses does not bring in profits but often causes the downfall of a trading account.
Because forex investors influence the activity of the market, investor psychology will also influence and be influenced by the market activity.
Newscasters affect how traders see the market. World news influences your view and that of all traders. It is because of changes in the market sentiment that sudden market movements occur after news or forum discussions on market stability.
The general consensus regarding forex psychology is that emotions lead to mistakes, therefore, expressing proper emotions and avoiding the four bad emotions of trading psychology is important to your success. In order to overcome your emotions, forex psychology urges you to set goals and make decisions that are based on facts and not emotions.
Emotions and Trading: A Dangerous Mix
Getting emotional over winning or losing can wear down a trader due to the nature of financial markets and the trading business. This often makes traders tired, discourages them and basically affects their ability to maintain a clear-headed approach to trading.
New traders operating without a trading plan are typically the ones who engage in trading forex based on emotional responses. They are also most likely to be under the illusion that trading is easy or that little risk is involved. However, this is far from the truth.
After a while, a catalog of losses may make the emotional responses too stressful for the trader to bear. It is at this point that the scared newbie trader is likely to remove themselves completely from the market by losing whatever money remained in their account.
Psychology of Successful Forex Traders
Generally, those who are successful in forex trading tend to trade with a well-defined trading plan. By simply sticking to their properly designed trading plan, they avoid wallowing in their emotions and escape any harmful effect.
In addition, by having their trading parameters laid out for them in advance, a trader can often exempt himself from the stressful worrying part of trading, as well as the need to make sudden decisions.
Rather, he can simply implement the previously devised plan without shifting grounds and then reap its rewards. One of the primary characteristics of the psychology of a successful trader is discipline and it plays a major role in doing this effectively.
After getting used to the basics, the trader can then proceed to an advanced level which includes knowing when to make exceptions to trading rules and when to follow a gut feeling instead. Knowing how and when to execute suitable money and risk management techniques is critical in this regard.
The Essentials of Successful Trading Psychology Habits
- Have a complete and profitable trading plan.
- Have a definite entry and exit rules for a trade.
- Always use stop-loss orders on open positions.
- Keep a trading journal.
- Keep a calm head and do not get emotional over trades.
A trader who does not have a plan will much more easily be run by emotions because there will be nothing else left to guide him in a new situation. This principle applies equally well to literally every situation in life but it is even more critical in forex trading.