Forex Trading Psychology
Posted in Forex Trading on 22. May, 2011
Posted By EightNine On 22nd May 2011
A lot of people think that forex trading is easy and in a lot of ways it is, at least in theory. Where most people get into trouble with their trading is with the psychology of trading. Knowing what to do is actually pretty easy, doing it is another matter entirely. It is important that you understand this before you decide to enter the forex market. If you are not aware of how forex trading psychology affects your success as a trader you are probably going to end up losing a great deal of money.
There are a lot of emotions that will affect your ability to trade forex effectively but by far the worst is fear. It is hard to do the right thing when money is on the line and the main reason for this is that we are afraid to lose money. You have to understand right from the start that not every trade that you make is going to be successful, you are going to have losing trades, if you are not comfortable with that you shouldn’t be trading forex. Even the best traders will be wrong about as often as they are right. The key to success is doing the right things when you are wrong. In many cases fear of losing will lead us to panic and do the wrong thing.
The other big emotion that affects forex trading psychology is greed. Despite what you may have heard greed is not good. The problem with greed is that it leads us to stay in a position for too long. Other than panicking when a trade goes the wrong way the worst thing that you can do is to hold a position trying to hit the absolute top. Buy low and sell high does not mean that you have to buy right at the bottom and sell at the top, it means you want to sell higher than where you bought.
Another emotion that can cause all kinds of problems with forex trading psychology is hope. While it is good to be optimistic when you make a trade there does have to be a reason for that optimism. If there isn’t you are relying on hope. This usually happens when a trade has gone against you and rather than just taking your losses and moving on you hold onto your position and hope that it will turn profitable. It rarely does and it usually leads to bigger losses.
The key to being a successful forex trader is to develop a plan and then stick to that plan. You should have a good reason for entering a position and before you do you should also have a plan for when you are going to get out. This should include a plan for what you are going to do if the trade goes against you. Then you have to actually stick to your plan, this is where a lot of people get into trouble.
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