Forex - The Psychology of Trading

Psychology plays an important role in any trading program, and this is equally true for Forex trading. For instance, we all have our own level of risk before we panic. The key to successful Forex trading, however, requires that we develop the ability to distance ourselves from our emotions and instead solely rely on our knowledge and the Forex system we're using.

Easier said than done.

If you've ever done any day trading or gambling or even overeating, you know that there's a psychological component that can sometimes be difficult to control. For many people, if a trade is going well (of in the case of gambling, if the betting's succeeding, or in the case of overeating if food isn't currently an issue) they feel completely in control. This makes it much easier to do the things they know they should be doing. Logic prevails over emotion.

However, when a trade has turned bad (and it happens to even the best Forex traders, no matter how much knowledge they have or how long they've been trading), suddenly logic moves to the back and emotion steps forward.

Like the amateur gambler, there's a shift in thinking. It'll turn around, becomes your mantra. Instead of following pre-determined stops, you let your trade dip below your exit strategy with the hope (emotional) that the trade will turn around and you'll not only recoup your losses but you'll come out ahead.

Or as in the case of the overeater, there's almost a masochistic resignation. The thinking goes something like this: well, the damage is done now (I've eaten that slice of cake that was forbidden), the trade's turned bad, it's lost, I might as well ride it all the way and see what happens, because there's nothing else to lose at this point. Again, a clear indication that your emotions have taken over.

All the Forex training in the world, all the knowledge and skills, charts and strategies are worthless if you disregard them when a trade has taken a turn for the worse.

So what's your psychological foundation? Do you turn to your emotions when situations become difficult or work against you? Do you double your bets as a gambler? Do you get a pint of Ben & Jerry's out of the freezer as a dieter? You're the only one who knows how your psychology works. And you're the only one who knows if you have the ability to control yourself or not.

Just remember this: success as a Forex trader is not the result of how you react when your trades are going well. It's the result of how you react when your trades are going bad.