Forex Psychology: How to Improve Tips
Never pick bottoms and tops
Some Forex traders are always trying to pick tops or bottoms.
These people want to sell at the top and buy at the bottom even before the Forex market has reversed. Those who try and pick these turning points are never accurate, their positions usually moves against them only for them to get stopped out before the market turns. It is always better to wait and open a position after the market has turned than try and predict before the market has turned.
Although there is always a turning point for a Forex trend, no one can predict the exact high and low of a Forex trend. The high and low is formed by the market forces.
Never Average down
Some traders keep buying when price falls lower so as to neutralize the loss once the trend starts moving in their direction. This never works because generally, when price starts to move in a certain direction it usually continues in that direction for a while.
The idea of buying against your first trade to offset its loss gets more complicated once the currency market starts moving against your second position.
When you need to open several positions just to erase the first mistake, you are entering new trades not because of your analysis, but to save your losses that can be easily avoided in the first place using stop-loss.
Know when to trade and when not to
A good trader understands that there are times when it is better to be in an all cash position and watching the market from the sidelines. Knowing when not to trade is just as important as knowing when to.
You can trade one day in a week and make profit or 5 days a week and make a loss. Its all about following your Forex system. If there is no signal to trade then do not open any order that day, it might mean the difference between keeping your account balance the same or making a loss that day.
Do not fall in love with your trades
The Foreign exchange market does not care which currency you buy or sell, and the market is always right. Do not marry your orders, the reason why trading with a plan is recommended is because most of the objective analysis is done before a transaction is executed. Once a trader is in a trade they tend to analyze the price movement differently in the hopes that the prices will move in a favorable direction instead of looking objectively at the factors that may have turned against your original analysis. Those with a losing position tend to marry their position, which causes them to disregard the fact that all signs point towards continued losses.
Never over trade
Over trading is a common mistake. They open high leveraged trades - by opening large currency positions than what their account balance can allow.
Leveraging your account too high by transacting far larger positions than before puts you in a very vulnerable position leading to bad trading decisions. Always limit your leverage to less than 10%.
Remain emotionally detached from the market and the excitement that its movement creates.
Do not let your emotions rule. Always be objective with your decisions.
Do not constantly check prices all day long unless you are scalping. If you get caught up in tick watching then you are going to make wrong decisions based upon greed or panic.
The truth is that many traders know it, but in the actual trading, they actually repeat the same mistake, they keep opening new positions that are against the trend in order to lower the average price. The result is that the first open position is already a few hundred or even thousand pips away from the current price.
Currency trading can be unpredictable. Sometimes even experienced traders fail in Forex. It does not happen due to lack of knowledge and experience. Traders who spent several years do have knowledge and experience. Sometimes they fail because of greed and disrespect to Forex psychology.
This science of Forex psychology is very important both for beginners and seasoned traders. Psychology teaches you to master emotions. When you are angry you forget about everything. You do not mind economic indicators. You forget about market forces. All you remember is that you need to earn money. But you totally forget about technical analysis. When you are too excited you cannot make reasonable decisions. Thus, you open positions not because your currency strategy suggests so but because you want to become a Forex millionaire. Some traders picture in their minds cars and houses they will buy after big wins that usually never happen.
The Psychology of trading is a subject not often discussed and dealt with. Traders usually keep themselves busy in finding a system or strategy that works for them. Finding the right system is indeed important, however, understanding the psychological aspects and barriers of currency trading should not be neglected.
Stick to a strategy to block out noise caused by short term factors that can affect long term profitability. Look at what the charts are telling you, the market is always right, never ignore what the charts are telling you. Finally back test and refine your analysis of charts to improve your strategy.
The Psychology of Forex is very helpful in controlling emotions. Emotions are very powerful forces in any investment market. This is why traders should have a good strategy.
A good strategy will consistently produce profits over the long term if properly followed, so be sure to control your emotions, do your homework, and stick with your plan and the pieces will fall in place.
Trading Plan - Forex Psychology Section