The Psychology of a forex trader

Psychology is a hot. issue in Forex. Psychological aspects do influence traders’ performance. Emotions often affect our ability to look at the market clearly and to think in a cold-headed fashion. Sometimes even high-profile, very experienced and skillful traders fail to control their emotions while trading. Traders must be able to control their emotions in order not be punished afterward.

What are the dangerous emotions?

Anxiety, fear, and panic

Anxiety is one of the worst enemies of traders. It tends to convince them that they will fail to earn money regardless of the power of their trading strategy. It is the most common mistake of novice traders.

Periods of market volatility are the most common catalysts of such irrational actions. Increased price fluctuations result in the loss of confidence in our trading choices, we start questioning our trading strategies and try to change something at the peak moments.

Keep calm. Panic will only distract you. Remember about your goals. Use Stop Loss and Take Profit orders. Once you put the protective orders in place stick to them.

Greed

Forex traders are money-oriented people. They have a drive for making money and attach a really great importance to their financial success. Moderate amounts of such an approach are quite necessary. You should learn to control your appetite for profits. Otherwise, you risk to drain your pockets.

For this not to happen, you should apply a disciplined approach to your trading activities that could minimise the role of emotions in our trading decisions.

Euphoria

Sometimes traders fall into euphoria. They experience an intense feeling of excitement and exaltation after a string of profits. They aspire to receive more in the future and see a truckload of trading opportunities. In simple terms, they get assured that they managed to find a flawless win-win approach to Forex trading. But in a longer term, they get disappointed because after the sunshine the rain begins. The trader comes gradually to believing that no market analysis is flawless; that next trade is not always profitable. The period of euphoria ends, and trader becomes more cautious in his/her future undertakings.

Don’t get carried away. Know when to stop during your winning streak.

Getting in the right mindset to trade successfully

The rule number one is to adhere to your initial trading plan and properly execute the basic money management rules. Follow a defined methodology. Rely on logic and not on impulse, as during an impulse trade you’ll likely forget about the proper risk management. You must feel that you are making the right play and not worry about the eventual outcome.

Don’t bury yourself in regret if the price continues to rise after you closed your bullish position. The market isn’t going anywhere and there will be lots of other opportunities to make money.

Some authors speak about the “zone” – a combination of positive mindset, focused attention, and adherence to trading discipline that allows the best traders to keep on producing outstanding results day after day, year after year.

Benefits of having a trading strategy

  • A strategy is a set of rules. It helps a trader to avoid the destructive emotions during trading, but only if the trader follows the strategy without any deviations.
  • A strategy can be backtested on the historical data, so you will have a proof that it can really work. Remember: you can use a forex demo account to test strategies in real time.
  • A strategy reduces the time of market analysis. As soon as the strategy provides the signals, a trader starts acting.

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