Forex Trading Psychology — The Art Of Mind Control
Indeed, you really do need to hone your skills at self-discipline and become a virtual Zen Master if you truly want to succeed in the fluid Forex market. Trading 24 hours per day (the market does close from Friday afternoon until Sunday) thanks to a network of inter-linked computers in financial institutions around the world, forex market is by far the largest and literally dwarfs the commodities and futures markets. Nearly $1.8 trillion change hands each day, and you can profit from the interchange of currencies if you can control the four most dangerous emotions that tend to cloud judgment and cost you profits. These four emotions include:
With the right investment strategy, forex market can certainly be very profitable, but greed is always a factor in any human endeavor—especially investing. Greed causes perhaps the greatest problem when it comes to investing in forex—overtrading. When an investor overtrades, there is a greater potential to risk too much and enter too late in the trend. Back testing should identify trends and help you determine whether the window has already passed so be sure to stick with your investment strategy and remember that the market is always right—greed can cloud our judgment quicker than anything else, but self-discipline and homework can help you maintain focus and profits.
Fear is another emotion that has helped drive the markets from the very beginning and will surely continue to do so in the future—predictably. Fear always leads to panic selling, but the market will always correct itself. The best way to combat fear is to learn and understand how the emotions affect the markets and then identify long-term trends. These trends will help you plan the best investment strategy so that you can maximize profits, but you need to have patience and look at what your charts are telling you.
Hope is something we all need but it can definitely cause some mistaken investment decisions, especially when it comes to staying with a position too long. Exit points exist for a reason so stick with them because the numbers don’t lie—period.
Unfortunately, we can sometimes have too much faith in our numbers. The short-term trend can look fantastic and cause us to invest before we have properly researched all the facts—like the long-term trends. If these two trends do not agree with one another, it is probably a bad idea to invest in a position.
The market may be driven by emotions, but it can also be predicted—because it has ALWAYS been driven by the same four basic emotions. To keep your head in the game, the profits up, and your analysis accurate—use these simple tips:
• Block out noise—short term factors can affect long term profitability if you make rash investment decisions
• Look at what the charts are telling you—the charts are your lifeblood so never ignore what they are saying because the market is always right and ego investing will kill any great strategy
• Stick to investment strategy—this does not mean ignore the charts…simply continue to back test and refine analysis of charts to improve a strategy where the results have not been panning out as planned
You don’t actually have to be a Zen Master to be successful on forex market. However, you do need to understand that there is a psychology in investing, and that emotions are very powerful forces in any investment market—especially the very fluid forex. A good investment strategy will consistently produce profits over the long term if properly followed so be sure to control your emotions, do your homework, and stick with your plan—and the pieces will fall in place.