Forex Trading Basic

What is Trade Psychology and why is it important?

Japanese candlestick Trading Strategy in Forex

What is Trade Psychology?

What is Trade Psychology? – If you ask this question to 10 forex traders, 6-7 of them wont be able to provide you a satisfactory answer.Trade Psychology is the study to find out the psychological problems that causes traders to lose money and getting solutions about how overcome those problems.

You must have noticed that whenever we decide to enter or exit a position in forex trading or take no action at all, different thoughts goes on in our minds. We always feel like we do not have the perfect information, or the capacity to process all available information to take a trading decision. We are highly influenced by subjective elements, and the reaction of the brain to various situations that can play a trick with us at any time.

Why Trade Psychology is important to us?

Our mind has been evolving for millions of years, and the depth of our brain structures that were critical to our ancestors survived in a totally different context. Unconsciously, this configuration of the brain continues to influence our thinking in different ways in decision-making.

Many beginners who have studied technical analysis may have a tendency to see figures and imagine market behavior patterns, when in fact they are just a figment of your imagination. Similarly, the fact that you were successful in predicting the market does not mean you can continue doing in the future.

Psychological Prediction of the market: Pros and cons

If you are asked 128 times- what is the next move of the market? Probably a number close to 64 guesses will be right (i.e., 50% of the sample). If you are asked again 64 times, probably you will guess right 32 times, then 16, 8, 4 and 2. We may have traders among us who have predicted 6 consecutive market behaviors and if they had invested real money, they would have won enough. But if someone tells us that they are market gurus, probably we would not believe them. Similarly, having thousands of traders around the world, it is possible that some have successfully predicted several times and are good traders; however, they may have done just because the sample was large enough.

Other studies indicate that we have a preference for belonging to groups of people, apparently because thousands of years ago, our ancestors performed most of the tasks in groups and isolated individuals were less likely to survive. Applying this to the Forex market, we can say that, unconsciously, be more in accordance with the advice and decisions taken as a group. It is proven scientifically that go against the general opinion; it causes a kind of discomfort. This allows us to conclude that investors who frequently interact with other investors, either personally with other known investors or friends, or participating in forums or online groups, should be careful because they can make the mistake of not assess with enough depth advice and decisions taken by the group or to follow market gurus assumptions. It is studied that one of the reasons why beginner traders fail is because they follow the advice of others.

Trade Psychology related mistakes and learning from them

Once you are involved in the world of Forex trading, you must all your mistake and learn from them, but it is important to have a clear idea about our goal and purposes. We can never get carried away by an emotion, as we have our investments at stake.

Study your trading investment properly

We must never let our investments on luck or a mere hunch, always analyze the trades performed and explore all possibilities and do an analysis before deciding to trade.

An average buyer thinks several times before spending $ 500 on an object. But a Forex trader often opens trade with much larger amounts with just a feeling. We cannot leave anything to chance; we need to make sure our investment gets return. So, study properly and always put the respective “stop lose “and “Take profit” for each trade.

Let your winning journey continue

This simple concept is one of the most difficult to implement and is the cause of the failure of many traders. Most traders break their original plan and withdraw their winnings before reaching the profit target because they feel comfortable to stay in a small winning position. These same people remain in positions that generate huge
losses, allowing the market to move against them for hundreds of points in hopes that the market will be tipping in their favor.

In addition, traders whose orders have been touched stop several times and saw how the market went above and beyond in their favor once they had left the trade. Remember, stop orders are there for the market to touch them and to prevent you from losing more money than a certain sum! The misconception is that any transaction will generate profits. If 3 out of your 6 trades are profitable, then you are doing well. So how do you make money if only half of your operations are successful? Just let your profits on successful trade to continue and keep losses to a minimum.

Do not bet your house on trade

Do not trade with the money that you can’t afford to lose. If you don’t have the extra money to trade, I suggest you don’t trade at all!

Do not take huge amount of leverage

Another common mistake is taking too much leverage! Leverage is a double-edged sword. Just because one lot (100,000 units) of currency requires $ 1,000 as a minimum margin deposit, it does not mean that a trader with $ 5,000 in account can trade 5 lots. One lot is $ 100,000 and should be treated as an investment of $ 100,000 and not as the $ 1,000 as margin positions. Most traders analyze the charts correctly and place
sensible trades, yet they tend to be leveraged in excess. As a result, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1: 200 leverage and never use more than 10% of your account at any time. Trading currencies is not easy! If it were, everyone would have been millionaires!

Accept your mistakes and learn from them

Do not make any excuse for your mistakes, such as: “I wouldn’t have done that, I did it because of that”. A mistake is a mistake. You must accept that. But accepting a mistake is not all! You should also learn from all mistakes you have done. Take each mistake as a learning element and make sure that you don’t do that again!

The bottom line

If you feel like you have problem with your money management system or risk management procedure rather than problem with Forex trading psychology, you may consider working with reading the articles on Money Management Tips in Forex Trading or Forex Trading Risk management.

READ MORE

Chapter 10Trade Psychology
Lesson 1What is Trade Psychology
Lesson 2Common Reason for Forex Trading failure
Lesson 3Forex Trading winning mentality
Lesson 4Emotional Weakness of Forex traders

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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