Forex Trader Psychology

Psychology and the mind of the forex trader are essential ingredients for success in forex trading. The lack of discipline and a method can be an obstacle to the success of the trader, as currency price movements in forex are unpredictable.

When a trader loses money on a trade, he sometimes calls into question his trading strategy. But sometimes the nature of our misconduct is the result of a psychological weakness, as are the mistakes we make in life. Traders who make money in forex have learned from their mistakes. They treat their mistakes as an experience from which they could learn to improve their approach to forex trading. They analyse past trades and seek a strategy that would have improved the results in the same market configuration. This short article will give you some useful ways to develop your mind and a positive trading psychology.

1) Stop orders protect your money!

The first thing a professional trader does after placing an order with his or her forex broker is place a stop order immediately on the trading platform. It defines a maximum loss, the typical new trader's error is to change the stop if the trade is losing hope that the market will turn around. Under these conditions, the stop has no use! A professional trader accepts the inevitable losses in trading and is pleased to have placed a stop that has protected his or her capital. The stop can be changed, but only to protect profits or to further secure the position by moving it to the break-even point. But in no case to increase risk taking.

2) Never use too much leverage!

Another common mistake among novice traders is to want to make gains rapidly using leverage. Leverage must be used to diversify positions in the financial markets and to increase the exposure to winning trades. The allure of a quick gain is a frequent cause of failure, a pro trader has a reasonable and realistic profit target. He or she pictures his or her performance in the long run. And even during periods of losses, he or she will not increase risk taking.

3) Adjust your position sizes according to the market!

The duration of your position is not important. The difference lies in the stop-loss or the distance from your target. This means that in order to trade a long-term trend, the stop must be large and the position needs to be small. The common mistake that novice traders make is to not define a position size and therefore leverage that is based on market volatility and the defined objective.

4) Secure your position to ride major trends!

Often for fear of losing profits, traders close a position before reaching their target and conversely they leave open a losing position, hoping that the market turns around. The trailing stop order can help secure the profits as it reduces traders' actions preventing him or her from making decisions driven by emotions. A well-run trade should not be closed manually, but with a stop loss, trailing stop or limit.

Trading psychology is a topic that is often not addressed and completely ignored. Generally, traders are concerned about their trading systems, but not their rigorous application. Finding the right forex trading strategy is important, but understanding the psychological aspect of trading should not be overlooked.

More about forex trading psychology and forex brokers at forex-central.net.

Learning how to become a professional forex trader

The forex is a huge financial market that offers very profitable investment opportunities to experienced traders. Beginning traders can learn the ropes on their own through websites and free demo accounts.  

What is the Forex?

The FOReign EXchange is the foreign currency market in which traders and investors from all over the world meet to buy and sell international currencies. To track the evolution of currency pairs and speculate on the forex, forex brokers provide traders with trading platforms. All you need is a computer and an internet connection to initiate trading orders on the exchange market.

Starting off right on the Forex

To get off on the right foot, it is crucial that you respect a few key rules:  

    - follow the macro-economic news of the principle currencies

    - learn the technical analysis of charts

    - learn money management

    - select a reliable broker that is regulated by the UK's FSA 

    - open a demo account

Many websites like www.forex-central.net are a genuine goldmine of information that allows you to freely learn about forex trading. Trader forums are also useful to ask for advice and learn about other traders' trading strategies. There are also trading courses given by professional trading trainers, in the form of classes or webinars. Books are also a good source of information, but the most important thing is to open a free demo account to discover forex trading with virtual money.  

Warning:

Speculating on the currency exchange market is risky in terms of losses linked to the use of leverage. Make sure that you understand the risks before you open a real trading account.

Forex: technical analysis

Online currency trading can be a good way to make money from an interesting and stimulating activity. The instant nature of online trades means that you can react quickly to changing forex conditions in order to generate profits.

Traders use technical charts to analyse the currency market's trends and potential rebound levels. Forex is a market that perfectly fits the styles of scalpers and day traders. Technical analysis is a particularly efficient approach to invest in the stock markets on a short-term basis. 

What is forex technical analysis?

Forex charts allow one to visualise the trends and correlations of the various currency pairs. With just a glance, forex traders can analyse what recently occurred on the market.  

No one can really see into the future, but it is possible to identify price levels where buyers and sellers will confront each other massively. Technical analysis also identifies chart patterns that frequently repeat over time.

How is forex technical analysis useful?

Forex technical analysis helps traders make logical decisions in terms of currency investments.

Technical analysis doesn't necessarily guarantee a return on your investment, but it improves your odds of success. It allows you understand some of the reasons why the market is rebounding on certain price levels according to the market's trends.

Technical analysis isn't a trading system, it simply provides traders with information about what happened in the past. It also gives indications to try to predict what will probably occur on the currency market in the near future. Such information allows traders to establish a forex strategy according to the various possible scenarios.

Forex charts are available on various websites and on the trading platforms which forex brokers provide.

Margin-based Forex Trading

The popularity of forex trading is partly due to margin accounts using leverage effect. Without this margin, trading currencies on the forex would be out of reach for retail investors. Margin accounts are available to trade on all sorts of markets, going both up and down. You can therefore trade the market online through a CFD broker, currencies through a forex broker as well as commodities, indexes, ETFs, precious metals, etc… 

What is margin and leverage effect? 

Margin accounts allow one to control large sums of money with a relatively small deposit. Opening a margin account with a forex broker allows you to borrow money from the broker to trade currency lots that typically have a value of $100,000. The amount of money you can borrow from a margin account is defined by the leverage effect. Leverage of 100:1 means that you can control assets that are 100 times larger than your deposit.   

With a 1% margin account (leverage of 100:1), you can trade a standard lot of $100,000 with a deposit of $1,000. Trading with leverage increases both the potential for profits as well as losses. The trader can therefore quickly lose his initial deposit if he doesn't respect strict risk management rules. Typically, brokers have a system in place which limits the maximum loss to the amount of the initial deposit by automatically closing positions if the loss is too high. This is called a margin call or a stop out. 

The advantages of leverage in a forex trading strategy. 

The advantage of margin accounts is that it allows you to profit from small currency market movements. It is possible to make profits even if the market is not very volatile. Forex currencies are quoted with small units, sometimes up to 5 decimals. The reference unit is the pip, which represents a variation of 0.0001, or the fourth number after the decimal. For example if you trade with a lot of $100,000 on the EUR/USD pair, each pip is worth $10. However, the value of a pip depends on the currency cross.

If the price of the EUR /USD goes from 1.4050 to 1.4150, there is a difference of 100 pips which represents a profit or loss of $1,000. If you had traded without margin with $1,000, a price move from 1.4050 to 1.4150 would have yielded a profit or loss of just $10. 

The risk of using leverage

Using leverage increases the potential for profits, as well as losses! If you're not careful, your margin account can quickly evaporate. With a 1% margin account, a 1% move in the wrong direction can make you lose $1,000. 

Forex traders nevertheless have several tools at their disposal to limit losses. They can notably use stop loss orders to automatically close their positions if the value of the currency reaches a previously defined point. Stop loss orders allow them to define a maximum tolerated loss in advance, this is a key aspect of money management.

Building a successful forex trading strategy

Any forex trading system requires individual choices.

Trading requires thought!

To become a successful day trader you need a specific trading plan, as not all trading strategies fit the profiles of all traders. Each trader must develop his own trading strategy that matches their trading style and personality. Some traders rely solely on technical analysis while others prefer fundamental analysis, but many traders successfully use a combination of both to get an overview of the market and for finding entry and exit points.

Technical analysis relies on a key concept: Prices move with the trend. As stated by the dictum of all forex traders "The trend is your friend.". Movements in the markets lead to identifiable patterns that have been studied for many years, a thorough understanding of these trends and chart patterns provides a good basis for developing forex trading strategies.

There are many analytical tools available to understand market movements. The beginning trader can initially consider each of these indicators separately to obtain a working knowledge of their concepts and their application. Each tool tends to reinforce the other, so traders must then examine the trading signals generated by the confluence of several indicators.

Support and resistance levels are used in many forex trading strategies. The support means a lower price level is tested repeatedly, and when the price reaches that level, it tends to bounce over. Resistance means a price level above which prevents the course of moving beyond. Levels of support and resistance can contain prices in a trend channel for a certain period of time before a possible fracture "break-out.

Moving averages are also frequently used in forex trading strategies. All forex brokers provide moving averages in their trading platforms. The simple moving average (SMA) shows the average price of the market at a given time and over a period of time. Moving averages serve to eliminate short-term fluctuations in prices to give a clearer picture of price movements. Traders can plot a SMA to determine the direction of the trend and possible reversal of course. If prices move above the SMA, the trend is bullish, conversely, if prices move below the SMA, the trend is downward.

These two examples of forex trading strategies can be used individually or in combination. In practice, the trader must have a range of trading tools to examine market conditions and to confirm his analysis. If several indicators show that the market moves in a particular direction, the operator can then act with more assurance than when relying on a single indicator.

Similarly, fundamental analysis can be used to reinforce technical findings, or vice versa. Ideally, the trader must master several indicators to develop a forex trading strategy effectively.

The technical and fundamental analysis to determine entry points and exits in a trend, but the management of risk (money management) is one of the most important elements to be defined in advance. The trader must know the maximum risk it takes on each trade. It must ensure cut its losses quickly and let the trades earn maximum benefit from the trend. The first goal of the beginner trader must not make profits, but does not lose his money.

Keep a diary of trading allows the trader to remember the past trades and make an assessment on the effectiveness of the strategy. It is also useful for improving the system that must evolve with experience and market fluctuations.