Forex Trading Psychology- What Makes A Successful Forex Trader?
There are 3 main reasons that Forex traders fail to make a consistent profit in the currency markets. One, they do not have a profitable trading system; two, they do not understand or apply sound money management to their trading; and three, their own emotions. In the area of a trader’s emotions, the one that can devastate a trading account faster than any other is fear.
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What does fear have to do with making money trading Forex? In a nutshell, everything! But before we go any further, let’s get a good working definition of fear (with regard to trading Forex).
Fear is a negative emotion that comes from anticipation of an unpleasant event that we believe will happen. Let’s bring it down to the context of trading. What unpleasant event do we believe might happen? Losing some or all of our trading account is the big one! That possibility we sometimes call risk. Risk is the probability of the unpleasant thing coming to pass; you trade despite your fear (just as I do), because we believe that the reward (profit) outweighs the risk (fear inducer).
When trading Forex you will hear a lot about a concept called “reward to risk ratio”. This is the quantifiable idea of how much each trade can possibly make, verses how much each trade may possibly lose. We carry on with the risk (trade despite our fears) because of the rewards we are seeking. Just as in all of life, a Forex trader constantly must weigh risk (source of fear) with the rewards sought.
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What does fear in online currency trading produce? Here are a few of the more devastating consequences.
1. Fear causes you to not enter a good trade after suffering a loss.
2. Fear causes you to enter a bad trade (against your own trading rules) so you can “make back” the funds you just lost.
3. Fear of losing profits on a trade that is going your way causes you to close the trade too early so you won’t “give back” the profit you are showing, and therefore giving up further gains.
4. Fear causes you to stay in a losing trade too long, hoping and/or praying that the market will turn around and you will get out with a profit instead of the loss.
How do you take on this “monster?” The simple, but not always easy answer, is to trade with a proven trading system, using sound money management and risk parameters, and understand that you will have losing trades.
Your goal, and the results of a good system and trading plan, will be to make more money over time than you lose. Only experience and discipline will get you to this point in your currency trading business.
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Comment by Svetlana Peetz — October 9, 2011 @ 5:45 am