Forex Trading Psychology Basics
Trading the Forex market involves more than just simply buying and selling currencies. It takes a certain personality to be effective and profitable in the highly volatile and ever-changing world of foreign exchange.
Success in trading often has more to do with factors that derive from the psychology of each individual trader than with just about anything else.
Having a great trading plan means nothing without the trading acumen to put the plan into action and the discipline to stick to it.
A number of very human elements make up the psychology of trading, and the chief among them are the emotional responses that people experience when trading.
Giving into such emotional responses does not generally result in profits and can often be the downfall of a trading account.
Because of the nature of financial markets and the trading business, getting emotional over winning and losing can wear down a trader. This often tires them out, discourages them and basically interferes with them maintaining a clear-headed approach to trading.
Trading Forex based on emotional responses is typical of new traders operating without a trading plan. They may also be under the false impression that trading is easy or that little risk is involved. Of course, nothing could be further from the truth.
Eventually, a string of losers may make the emotional responses too stressful for the trader to bear.
At this point, the uncomfortable neophyte trader will often proceed to take themselves completely out of the market either consciously or unconsciously by losing whatever money remained in their account.
In general, successful Forex traders tend to trade with a well-defined trading plan. A properly designed trading plan when carefully adhered to allows a trader to avoid wallowing in their emotions and any deleterious effects by simply sticking to their trading plan.
Furthermore, as a result of having their trading parameters laid out for them in advance, a trader can often take out the stressful worrying part of trading, as well as the need to make quick decisions.
Instead, they can simply implement the previously devised plan without deviation and then reap its rewards.
Of course, discipline plays a major role in doing this effectively and is one of the primary characteristics of the psychology of a successful trader.
After mastering the basics, things can then be taken to an advanced level. This means knowing when to make exceptions to trading rules and when to follow a gut feeling instead also makes up an important part of advanced trading skills.
Knowing how and when to implement appropriate money and risk management techniques is crucial in this regard.
The essential psychological elements of a successful trader, therefore, come down to following general trading guidelines:
Having a comprehensive and profitable trading plan.
Having definite entry and exit rules for a trade.
Always using stop-loss orders on open positions.
Keeping a trading journal.
- Keeping a calm head - not to getting emotional over trades.
Developing these good trading habits helps in improving one’s trading psychology.
Consider, for example, the case of having a precise trading plan for all actions that will need to be taken in different situations.
If a trader doesn’t have a plan it’s much easier to be run by emotions because there is nothing else left to guide the trader in a new situation. This works equally well for literally everything in life but it’s even more important in Forex trading.