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Psychology and Forex trading


Psychology and Forex Trading

Have you ever wondered why FX trading is so profitable for some people and an unmitigated loss for others? How could people trading in the same market conditions end up in such extreme disparities? The answer is simple – discipline! The FX trader who is not in charge of his emotions will almost certainly be quitting after a short period of great regrets while the person who is in charge of his emotions will continue to prosper.

Create a strategy and stick to it

While FX trading is not rocket science, it has to be guided by strategy. As a FX trader, you need to develop your own strategy and stick to it. Fortunately, a new forex trader does not need to re-invent the wheel. There are experts who have developed systems that have been proved to work and learning from them could be highly beneficial. The most important thing in forex trading is to keep emotions under control.

Deciding when to enter and quit trading

When a trader does not have a trading strategy, emotions run high and the decision to enter or quit trading is not governed by rational thought. Granted, the temptation to enter trading based on how you see your currency pairings move is always very high. However, you should remember that the FX market tends to be quite volatile. If your decision is not based on any strategy, do not be surprised to see the market move against you immediately you enter trading. In a scenario such as this, the trader is operating simply out of greed and the consequences could be catastrophic. Conversely, when emotions rule, a trader will quit a position because a loss seems imminent but immediately after that things improve and a profit that could have been made is lost.

How do I set up a strategy?

Setting up a strategy is a matter of personal decision. The important thing is sticking to your plan. Your strategy could be as simple as this: you could decide to take your profits when you reach a certain percentage (say 30%) and to issue a stop-loss order at 10%. However attractive the currency movements might seem, you will be taking a major risk if you fail to take your profits at the predetermined level.

Why you should trust strategy and not emotions

Gut feelings lead to spur-of-the-moment decisions and that is why they should be avoided at all costs. Strategy on the other hand is based on scientific analysis and is therefore more reliable. Currency movements can be predicted but variations in the trends are inevitable and thus the temptation to rely on emotions.

Successful forex traders are the ones who develop a strategy and stick to it no matter what their heart tells them. When all is said and done, an anticipated loss is more manageable than one that has been caused by panic. When developing strategy, it helps to remind yourself that you will stick to it and be ready for whatever consequences.