Forex Psychology: Emotions Fear and Greed
Most investors are not satisfied with 20%-40% profit annually, what they want is double or triple their Forex account equity.
With the right investment strategy, the Foreign exchange market can certainly be very profitable but greed is always a factor in any human endeavor, especially in investing. Greed in Forex leads to over trading. When an investor falls into this trap, there is a greater potential to risk too much. Greed can cloud your judgment quicker than anything else. This is where self-discipline can help you maintain your focus and your profits, to maintain discipline investors require to use the right psychology principles.
Forex psychology - teaches you how to fight your greed and set realistic goals. Greed is what makes most investors to lose. Profit is never enough. Everyone wants to earn more money. Well, some traders do succeed once or twice. That is called good luck. But short term profits mean nothing. If you focus on good risk management in the long term you will keep winning.
A good principle is, not to use more than 5% of the margin, and not to risk more than 2% on any one single transaction.
Fear is another emotion in psychology that affects the Foreign exchange markets. Poor trading practices, such as taking on too much risk with excessive number of transactions can magnify the normal stresses of the market place. The best way to combat fear is to learn and understand how emotions affect the markets and learn how to avoid these emotions when trading the foreign exchange currencies.
Identifying long term trends can improve results, identifying these trends can help you plan the best investment strategy so that you can maximize profits, while at the same time keeping the emotion of fear at bay.
Sometimes, however, psychology problems have nothing to do with your strategy. They are the results of pre-existing problems that will not be solved by different strategies and methods. Your biggest enemy when trading is you. It is not the market or the brokers. It is you! If you do not have a professional Forex mindset then you will make the wrong decisions and lose money on a consistent basis.
Forex psychology teaches courage. In Forex it takes a lot of courage, patience and experience to make huge profits.
Hope can cause investors to make mistakes when it comes to investment decisions, especially when it comes to staying with a losing position for too long. Exit points exist for a reason and losses should be kept to a minimum.
The market may be driven by emotions but it can also be predicted; because it has ALWAYS been driven by the same basic human emotions.
Forex psychology - is based upon how well you know yourself to be able to profit from your strong points, as well as control you weak ones, it has a lot to do with how successful you will be when it comes to investing. When you truly know yourself, then you are aware of how you are going to react under certain circumstances and you can protect yourself from self-damaging actions or decisions when it comes to managing a transaction.
The right mindset can be a tool that can help an investor control and predict their emotions so that they are able to make correct decisions based on facts. The lack of this psychology can be a hindrance to success since the movements of the exchange currencies are pretty unpredictable.
The right psychological outlook can help investors face the issues and make sound decisions in the end. There should be a balance among all the different aspects of trading that determine whether an investor will be successful when transacting.
This is a part of the Forex Plan about mindset
- Invest without Emotions (greed, fear, anticipation, impulse, bias, over-excitement)
- I trade what my eyes see not what I feel.
- I will be patient.
My job is not to be the trade system!
It is not to decide which signals looks promising.
That is the job of my trading system. My system has a set of rules which tells me this is what I follow. Do not get caught up in price action and make rules as you go along.
MY JOB DESCRIPTION IS
To sit patiently and wait for my system to indicate that it is time to enter or it is time to exit. And then with great focus I execute my strategy as planned.
Taking trades not indicated by the system, second guessing the system and not taking those given, hesitating and getting in late, anticipating and getting in early are all common place and boil down to lack of faith in the system and not having a burning focus on accurate execution.
GOAL: To have 100% undivided focus on mastering my ability to execute my system accurately.
The more you develop the ability to step back from price movement and watch the market dispassionately, waiting for a signal, the easier it will be to witness the fluctuations of your emotions without getting sucked into them allowing them to throw you off your game.
- I am greedy.
- I over-trade
- Make a list of all your weaknesses that are interfering with your strategy. This is the first step to help you overcome these weaknesses. Use psychology to help you overcome them.
NB: by writing down your weaknesses you will start recognizing them as you progress, once you do this you will start to avoid this mistakes and your results and profit will improve.
To learn how to write these guidelines on your Forex plan, read the FX plan tutorial at the key concepts tutorial section.