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Home  >  Trading basics  >  Forex psychology


Forex psychology



Forex psychology changed little with time, as human will always make the same mistakes over and over again.

Joey McIntyre, Australian wealth coach said that traders are always too fearful to buy when the market is down (fear to enter the market) and too greedy to sell when the profit is at its peak. Although these two scenario can be solved by getting familiarize with forex using a demo account, there are people who dive straight into the market without a clear idea of what they are getting into. Once an investor can consistently generate profit using a demo account, his level of confidence and expertise will take care of the first problem, which is the fear to enter the market. However, a demo account may not deter greedy investors to hang around longer than they should. It could be that they failed to exit when the profit is high or they get into more trades in a bid to get rich quick. The best way to deal with greediness is to set a daily goal and stick to it. Once a goal has been reached for the day, simply stop and divert your attention elsewhere.

On the other hand, there are also investors who gets satisfied too easily, setting their target exit point just above the break even point. This type of investors will also tend to hold on to losses with the hope that it will eventually go up and they would not need to make a loss. To them, it is never a loss until you sell it, so they continue to hold and wait while the market crash further. This mentality of limiting profits and holding losses is the exact opposite mindset that a successful forex trader should have. Ideally, a forex investor should always use a stop-loss order to limit loss but let the profit grow.

Speaking of stop-loss, some people may not use them simply because it cost some money to buy. Therefore, it is quite a common sight to see investors buying against his first open position to neutralize the loss. This may work, but when it flop, it is going to flop big time. The idea of buying against your first trade to offset its effect may get more complicated if the market once again go against you in your second trade. When you need to open several position 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. This type of investors are looking for the best time to cut loss but the best time came and go while their greediness tell them to hold. Investors will have a better mind clarity when they bite the bullet in the event of a loss and start anew using strategies to generate profit more than enough to cover their losses.

New traders will be easily thrilled by the idea that they are entering the forex market, even though they have not made any profit from it. Over eagerness can lead to them following trends and news blindly, and being overconfident of their venture. This group of traders may eventually evolve into two categories of investors - the proud 'know-it-all master' or the weary small time trader. A small time trader will likely adopt the profit limiting, holding losses style because of their previous bad experience while the know-it-all master will tend to follow his own gut instinct rather than listening to the charts and figures because he is used to winning. Needless to say, the profit limiting group will be lucky to break even in forex and the master will win only to lose it all in the end due to his own psychology.

Last but not least, there will always be people who abuse their margin facility. Since they can have $100 controlling $10,000, some get carried away in heroic buying without stopping to consider its consequences. Unless you have a good strategy and always practice using stop-loss, it is best to not exceed 10% of your margin trading facility.

Human mistakes will repeat itself without some form of awareness and effort to prevent them. Some say that having the wrong forex psychology is a battle lost even before it began. If this is true, then cultivating the correct forex psychology is half a battle won.

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