Forex trader pyschology

As a forex trader you rely on your skills to read into fundamental indicators, decipher technical patterns of multiple currency pairs in minutes and gauge market sentiments. However, it is as important to control your emotions when making trade decisions. The key is discipline.

4 basic emotions & trading psychology

Humans are controlled by four basic emotions: happiness, fear, greed and desperation. The forex market in many ways reacts to these emotions. You will see these reactions as sudden jumps on hearing a positive news or sharp drops in case of panic. The US dollar for example has been on a decline ever since the strike of financial crisis in 2009 on account of fear among investors that the US economy is weakening. However, in this case the macroeconomic view is aligned to market sentiments.

Even experienced traders are affected by temporary but sudden fluctuations in price. They deviate from their initial decision either under fear of losing more capital or missing out on potential profits. If you trade based on your emotional bias, the result could be a net loss or missed opportunity on large gains, neither of which is fun.

Focus on the "Process" that works for you, refine it and in time you will see profits.

The importance of trading rules

To get their heads in the right place before they feel the emotional or psychological crunch, investors can look at creating trading rules ahead of time. In forex trading (as in other instruments) a Trading Plan can be used to manage a trader's emotions. Before each trade a trader should sit down and write the steps he or she will take depending on hypothetical changes in the market.

Traders can establish limits where they lay out guidelines based on their risk-reward relationship for when they will exit a trade - regardless of emotions. Of course, establishing price targets might not be the only rule. There is a lot more to it. In the following sessions we will learn how to create a trading plan.

How to create a trading plan?

  • Forex trader pyschology

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