Forex Psychology Principles
Trade with the Forex trend only
Stay focused on the large market trends and do not try to react to every price action move. "The trend is your friend!" follow it. Investors need to follow the trend when transacting currencies online. One of the principle of market psychology is to always trade with the trend.
Most beginners will enter the market when the price chart shows a steep movement. These traders don't even take the time to understand what forces are causing such a movement and thus make the mistake of being too eager to enter the market; they want to rush and be the first ones to enter the market after an economic data is published, without any regard to the direction of the trend only to finally realize that it was just a whipsaw when they are already in a losing position. In such situation, most seem fearless, not fearing making losses and only worrying that others are making profit while they sit on the sidelines. In Psychology this is the opposite of what they should be doing. In your plan you should write clear guidelines within their currency plan on how to avoid this type of mistake.
In Forex, the rule is to never be too eager to enter the market; learn to overcome the feeling of worrying that you will be too late to make a profit. Take time to analyze what's the impact of the economic data released.
Sometimes this breaking news does not dictate the forecast of the likely direction. You have to analyze carefully if it will have a big impact on the currency prices. Most often, these data gives false entry signals.
It is important that you overcome your eagerness to be the first one to enter the market using Forex psychology. You have all the time to analyze the impact of this breaking news before you enter the market.
It might take more time but your trades will be moving in the right direction. This is what we call following the trend.
Trade with a disciplined Forex plan
Investors should not base their positions on a just a hunch. Positions should only be executed using a well organized plan. The plan should specify the rules of entry and exit. Use the psychology section to specify your trading mindset when opening currency transactions.
Investors should examine all of the factors carefully before opening a position and they should not let fear or greed or someone else's influence to cause them to enter or exit a position before their Forex system gives a signal. Don't let temporary circumstances erode your convictions, use discipline to follow your plan.
Using a consistent and disciplined plan eliminates the need to make rush decisions based on short-term price action moves.
Cut your losses and let your profits run continuously
Some investors hold on to losing positions for a long time in the hope that these positions will move in their direction after some time. However, this never happens and the market keeps moving against these losing positions and makes them lose even more.
The other mistake that investors make is to not take the profits at the opportune time, all investors should try to maximize profit per trade but at the same time be aware when the trend changes and close positions at that time and not wait while their positions in the market are open. Only keep positions as long as the trend is in place and close once the trend shows signs of slowing.
Losing Forex investors see loss as failure. Winning investors see loss as a learning experience, this is one principle of psychology which helps them improve their profits.
When winning traders make a loss, they haven't failed, they've just learned something new about the way the currency market works. Winning traders always look at the big picture and stick to their Forex plans.
Many currency traders in a losing position wait for the best time to cut a loss. However, the best time to exit never comes and the transaction continues to lose money. The best time to exit is when the loss is low i.e. less than 30 pips but not when the loss is hundreds of pips. Your account may be wiped out while still waiting for the trend direction to move in your favor.
A losing position from the start is likely to stay like that - Popular Saying by Investors.
Use psychology and learn to cut losses and avoid holding onto losing positions because of the hopes that the market will move in the other direction. There is always a new opportunity to trade as long as your margin is not tied up in a losing position.
An investor should get released from a negative psychology and apply the money to do another currency transaction. An investor should cut the losses quickly and move to profit making positions. Some investors will end up sitting on a losing position; they usually allow the price to move against their position many pips while hoping that the trend direction turns and goes back in their favor.
Profits are made when trades are closed not when they are opened, therefore be ready to close your positions as many times as possible.
It is a wrong belief that each transaction will gain profits. One can still make money even if only half of his transactions are profitable. The question is how an investor can make profit with only half of his transactions winning, the answer is that one should keep the losses at a minimum and open other profitable trades. This way greater number of profit transactions offset the losses.
To learn more about psychology and how to transform your mindset using a Forex plan go the lesson FX Plan.
Currency Plan - Psychology Section