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Forex Trader's Psychology

trading_psychology_small_smallBefore beginning to trade in the Forex market, a trader must analyze his potential positions properly and give thoughts to the trading plan for the next day. Many novice Forex traders always neglect this part of their training and because their anxious to make money jump into trading based on hunches and guesses.

It is only through careful analysis and planning that a trader can keep his losses to a minimum and at the same time maximize his profitability. Thus, make sure that you have a trading plan to limit your losses and lock in your profits before starting out on your Forex trading. It is important that once you have a trading plan in place, you should adhere to it. This is another area where the majority of traders fail to keep in check. Without strong discipline, one can easily deviate away from one’s trading plan and start to trade based on guesses and hunches again. They stop closing their position at their profit target or hold on to a declining market position for too long in the hope that it will rebound back.

One other major psychological mistake that traders make is the assumption that all trades are profitable. They might have reached this assumption because of particular instances where the stop order is triggered and later the market rebounded back favorably. This can easily lead to these traders forgetting to place Stop orders on their subsequent trades. They forget that the Stop orders are there to prevent them from losing more money than they would otherwise. One has to remember that Stop orders do not act as an impediment to making profits. Although, occasionally a Stop order might be triggered and a trader loses a certain amount, if he maintains his original plan, his profit run will more than make up for his initial losses. This is why it is crucial that a trader always adhere to his original trading plan.

Forex traders must also guard themselves so that they will not become emotionally entangled with their trading. What happens when they become emotionally entangled is that when they make a trade, they cannot let go even if it is a losing trade. What a trader must do is to always maintain his original stance and never deviate from it. He must always be objective in his investment decision so as not to cloud his judgment.

It is not uncommon for a person to want to justify his action by making excuses through an alternate analysis. Because he is already emotionally entangled, his subsequent analysis becomes tainted and biased without any objectivity. This sort of mentality causes a person to lose sight of their initial goal. And coupled with the fact that they can leverage their trades, this can cause a trader to multiply their losses more than they anticipated. They easily slip into the mode of overtrading hence opening them up to a situation of more liability without any objectivity. They forget that their liability, is not limited to the amount that is available in their trading account but on the transacted value of their contracts. As the norm, a trader should never try to use more than 20% of their margin account at any one time.

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