Psychological Factors Affect On Forex Trading

By: Himanshu

Trading in Forex and Stock markets is not only about the knowledge and understanding of the fundamentals or technicals. Trading is an art in itself. Even with a great knowledge and understanding of the market, you may find yourself continuously losing in your Forex trades. You may know that the market will go up and you buy. Instead of going up the market starts moving down your stop-loss order closes your trade. The next minute you see that the market starts moving up, the way you had analyzed. You end up with a loss in the previous trade and now you are worried to buy again though still you have the feeling that it will continue to move up. It keeps on moving up and now we are just frustrated about our not taking an action of entering the market and also the unnecessary loss (because we put the stop-loss too close) in the previous trade. We just buy a bigger position out to make up. This time we put the stop-loss order too far. The market had already moved up quite a bit and as soon as we bought it does a free fall. Our stop-loss was too far and Oooops!!!

The emotional feelings, fear, greed and many times the addiction to trade can just kill what we have in terms of market knowledge. Psychological factors and sentiments greatly affect the performance and hence the results because of the dynamics of the market. When we talk about psychology, it’s about both, the mass psychology of the Forex traders around the globe and our individual psychology.

Mass Psychology:

We do not have any control over the mass psychology but an awareness and understanding of it can help in what decisions we take at what times and situations. One example of mass psychology in the normal times is given in another article on the page by the name “Number Psychology”. Other examples can be seen in panic situations. The mass panic can fail all our analysis – weather fundamental or technical. In this article we will be talking about individual psychology.

Individual Psychology:
Let’s start with the most common mistakes which can either wipe our profits or prevent us from going into profits ever. We all can make one of these common mistakes in our Forex trading career once or even more than once. The killer of a Forex trading career is to make one or more of these mistakes as a pattern. To kill our pattern, we need to understand our pattern and this can only be done with the thinking and analysis with completely open mind as knowing ourselves, many times, prove to be more difficult than understanding others . We need to understand ourselves first to understand our actions and reactions and then to control the undesirable actions and reactions.

So lets’ see what are the killers:
1) Always entering the market against the Trend.
2) Entering the market in the direction of the trend when its too late.
3) While losing, increasing the positions in the same direction.
4) Trading addiction and trading by feelings.
5) Stop-loss orders too close or too far.
6) Take-profit orders too close or too far.
7) Learning from the past mistakes and then making a bigger mistake.
8) Loving our trades and bias for the figures.
9) Trading too big for your account size.
10) Varying the position size of your trades.
11) Not looking at the both at the long-term and short-term picture of the market.
12) Not using the stop-loss order- THE ULTIMATE KILLER (you can do all mistakes and still survive but you do this and you have invited the death of your account).