Forex Trading Psychology

By: martinchandra
Forex is a somewhat unique market for a number of reasons. Firstly, it is one of the few markets in which it can be said with very few qualifications that it is free of external controls and that it cannot be manipulated. It is also the largest liquid financial market, with trade reaching between 1 and 1.5 trillion US dollars a day.

With this much money moving this fast, it is clear why a single investor would find it near impossible to significantly affect the price of a major currency. Furthermore, the liquidity of the market means that unlike some rarely traded stock, traders are able to open and close positions within a few seconds as there are always willing buyers and sellers.

However, the key to successful Forex Trading unlike other financial markets, is knowing yourself.

This does not certainly mean enlightenment of self but knowing your behavioral pattern under given circumstances. This becomes all the more important since falling into psychological traps like despair, will lead to furthering ones losses. One should know when to quit.

The most common traps or pitfalls of human psyche in relation to Forex Trading are as follows:

The first, foremost and most prevalent is Over-confidence. It has been found after painful research that most people tend to overrate their capabilities, skill and knowledge when it comes to areas outside their core competencies. Forex Traders should give importance to results and feedback to stay within their areas of competence.

The second is prioritized thinking. Any human being tends to assign more weight to the initial information received than the subsequent ones. It is very important to explore all sources of related information and form ones thoughts around that to arrive at a rational decision in the right perspective.

The third is to look at the circumstance in the right light. Each problem or development has to be viewed in the right light and given enough weight to gauge all probabilities, so that decision making becomes easier and efficient.

Let bygones be bygones. An investor should not make decisions based on similar circumstances in the past, when he mad a right decision. In the volatile market of Forex Trading, circumstances change extremely fast and the investor should be capable of weighing all choices before committing to a decision.

An investor tends to make the mistake of seeking only relevant information supporting the decision. Therefore the decision becomes preconceived. All information contradicting the decision is seen in a critical frame in this scenario. This is also called the confirmation trap and should be avoided at all costs. Decisions are really not made by instincts but by a good combination of circumstances and experience.

Lastly, an investor should know his behavior under duress or stress. Each human being has dissimilar behavior patterns under stress. This knowledge will help in deferring a decision taking process or drive the investor to relax before embarking on the process of making a profit making decision.
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