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by ForexNewsNow Team on July 11th, 2011

The Psychology of Forex Trading

ForexNewsNow – According to some sources, over 80% of successful trading habits can be attributed to a trader’s mindset and attitude when initiating positions and managing their risk. Most people actively trading through an online forex broker will have an understanding of what a trader’s mindset might be.

Forex trading online requires more than a well developed trading plan. Even the best trading plans can fail if the trader implementing the plan loses discipline. The human element in the trading arena makes up the reason for the volatility commonly expressed in the marketplace.


Psychology of Making a Trade

Before a trader decides upon taking a position in the market, they generally have a reason for establishing a position given by their trading plan. The trading plan would typically have certain parameters which when met, would generate a buy or a sell signal for a currency pair.

Typically, the trader generally takes the trading plan’s signal and either waits for an appropriate time to initiate the trade, or they will take on the trade immediately upon receiving the buy or sell signal.

Once the trading position has been established, most professionals will enter a stop loss order to minimize risk in the eventuality that the trader erred on the direction of the market. By immediately placing a stop loss order, the trader establishes the precise amount they are willing to risk on the position.

In addition to determining the placement of a stop loss order to limit risk, most accomplished traders will also have determined the optimal exit level for their position according to their trading plan.

Seasoned traders generally adhere to their trading plan. Nevertheless, a certain amount of flexibility can be exercised in some cases, such as when taking profits.


How Traders Deal With Losing Trades

Taking losses makes up a large part of trading in the forex market, although, how the losses are taken separates the novices from the seasoned traders. Most experienced forex traders will typically get out of losing position quickly, while letting their winners ride.

A less experienced trader often will hold the losing trade in the hope that the market will reverse and the trade will return to profitability. This can also be true of an experienced trader depending on their level of confidence and how sure they might feel about the direction of the market.

The two psychological elements in the above example consist of the emotions of fear and hope. The seasoned trader immediately shows a loss and fears losing more, thereupon exiting the position quickly.


Conversely, the less experienced trader will typically hold the position in the hope that the position will reverse and trade to profitability. This can seriously hamper the trader’s decision making process and in some cases paralyze the trader, impeding them from taking a loss in a timely manner.


Limiting Risk and Getting out For a Profit

Two very important factors in trading involve the managing of risk, and knowing when to get out of profitable trades. In trading, profits usually take care of themselves, but losses can put you out of business. It’s not what you make in the market, but what you don’t lose.

Getting out of losing trades quickly allows the trader to reassess their opinion of the market and decide when to get back in. If the trader holds a losing trade waiting for the market to reverse, the trader can be held back from making profitable trades.

Having clearly defined risk parameters and always placing stop loss orders with every open position can mean the difference between a trader that continues trading or a person that must return to their job. Most online foreign exchange brokers accept stop loss orders.

Seasoned traders often determine where they will take profits before even entering into a position. Most rely on technical resistance levels on a price chart in addition to other indicators which confirm the market is getting ready to reverse.

After a position becomes profitable, many traders will place a trailing stop order. This will ensure that the position will be exited once the market turns and will give the trader a guaranteed return on the trade.

By ForexNewsNow Team

This is a general account of the ForexNewsNow Team. It is used to published exclusive content carefully crafted by our experts as well as it is used to bring you the most recent industry highlights from our guest contributors that wish to remain anonymous.

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