Forex Trading Psychology - How Mentally Prepared Are You?

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Forex Trading Psychology - How Mentally Prepared Are You?

Summary: In many competitive areas, the difference between winners and losers comes down to the mindset of the individual. Trading in currencies is no different. Your forex trading psychology will be vital and the more you understand yourself, the better you will perform.

Fear and greed are two major driving forces in any financial market and the currency markets are no exception. Fear, greed, hope and other emotions should have no place in your trading should you wish to be successful in the long run.

Forex trading psychology is usually underestimated, however it is one of the major factors that determine the success - or failure - of individual traders.

Here are some possible “emotions- based” scenarios that might happen if you are not disciplined enough to follow your strategy and don't have a ' stop loss ' in place.

- When the price goes against you and you lose money, you start hoping that price will turn back and you will recuperate the loss so you do not exit the trade even though your trading plan clearly indicates that. There should be no “hoping” involved.

- When you are in a winning trade and it is time to leave the market you want more so you stay and see how it is going to turn out even though you go against your trading strategy and money management techniques. This way the winning trade can become a loser. Greed should have no place in trading.

- You win money, price goes in your direction then retraces a little bit, it hasn't reached your stop loss point yet but you are already in a panic to lose money so you exit the trade immediately and then price just turns back into the direction of your trade without triggering your stop loss and goes up 200 pips in the matter of 4 hours. If you stayed in the trade you would have won lots of money but you panicked and didn't adhere to your own well-tested trading strategy. Your actions were based on fear.

Studying the psychology of successful currency traders can help to understand different unwanted behaviors and eliminate them. In fact these are just normal human behaviors when it comes to financial uncertainty and possibility to lose or gain lots of money however it will take you nowhere in forex.

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In fact, if you are looking for a deeper understanding of how we humans behave when faced with large financial risks and split-second decisions, it might be worth taking a little time to study poker. Top level poker players have to learn to rationally assess a situation in seconds when there are very high financial stakes. Then - whether they have won or lost that hand - they have to reset their mental state so that they can play the next hand on it's own merits. This isn't easy!

Knowing yourself can help to develop better trading plans so that your own psychological barriers to trading and success will be eliminated. If you find yourself lacking in certain areas, we advise looking for specialist forex trading training that can help you to push through your own barriers.

To overcome the emotions you need to be disciplined, trade according to your trading plan only, have good money management and risk management strategies. You should never consider losing more than 3% of your account on any individual trade and hence place your stop loss point accordingly.