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. Dont 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. Dont keep lowering your stop-loss order in anticipation of an upturn in the market that may not come for some while, and dont 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 doesnt 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. Dont 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. Dont 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 youre 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.
Forex trading mistakes and what to do with them
1)Belief change.
Every mistake is a learning experience. They all have something valuable to offer. Try to counteract the natural tendency of feeling frustrated and approach mistakes in a positive manner. Instead of yelling to everyone around and feeling disappointed, say to yourself "ok, I did something wrong, what happened? What is it?
2) Identify the mistake made.
Define the mistake, find out what caused the mistake, and try as hard as you can to effectively see the nature of that mistake. Finding the mistake nature will prevent you from making the same mistake again. More than often you will find the answer where you less expected. Take for instance a trader that doesn't follow the system. The reason behind this could be that the trader is afraid of loosing. But then, why is he or she afraid? It could be that the trader is using a system that does not fit him or her, and finds difficult to follow every signal. In this case, as you can see, the nature of the mistake is not in the surface. You need to try as hard as you can to find the real reason of the given mistake.
3) Measure the consequences of the mistake.
List the consequences of making that particular mistake, both good and bad. Good consequences are those that make us better traders after dealing with the mistake. Think on all possible reasons you can learn from what happened. For the same example above, what are the consequences of making that mistake? Well, if you don't follow the system, you will gradually loose confidence in it, and this at the end will put you into trades you don't really want to be, and out of trades you should be in.
4) Take action.
Taking proper action is the last and most important step. In order to learn, you need to change your behavior. Make sure that whatever you do, you become "this-mistake-proof". By taking action we turn every single mistake into a small part of success in our trading career. Continuing with the same example, redefining the system would be the trader's final step. The trader would put a system that perfectly fits him or her, so the trader doesn't find any trouble following it in future signals.
Every trading activity is in fact participating in a battle. Winning the battle is a matter of knowledge, skill and experience. If you miss any of those you are going to join the long line of losers. Some says that 95 to 99 percent of the traders are lining up on the loser's side.
How to win the battle in the currency market? It is easy to answer that question, based on the above approach prepare yourself for the battle. If you treat currency market activity as a hobby you'll ultimately lose all investments there. If you treat it as a business you still may loose everything.
The correct approach is: consider each pressing of the Buy/Sell button as entering a battlefield. If you enter it without having a knowledge, skill and experience on how to win, you are destined to fail. You may have some lucky trades in the beginning, though. That, by the way, is the worst case scenario for the rookie in trading.
The earlier you get your bad lessons, the better for your overall experience. No mater how good you consider yourself prepared, after demo trading lessons, you have no idea of the forces ruling on the real market.
In fact the worst enemy you are going to face in the very beginning is not hiding behind the walls of the global currency trading centers. Your most dangerous foe is hiding deep inside of you. That enemy is so powerful that you will be amazed how quickly it will wash away all your carefully considered decision.