Trading Psychology Basics

Trading the forex market involves more than just simply buying and selling currencies. It takes a certain personality to be effective and profitable in the highly volatile and ever changing world of the foreign exchange market.

Success in trading often has more to do with factors that derive from the psychology of each individual trader than with just about anything else. Having a great trading plan means nothing without the trading acumen to put the plan into action and the discipline to stick to it.

A number of very human elements make up the psychology of trading, and chief among them are the emotional responses that people experience when trading. Nevertheless, giving into such emotional responses does not generally result in profits and can often be the downfall of a trading account.

Emotions and Trading: A Dangerous Mix

Because of the nature of the forex market, getting emotional over winning and losing can wear down a trader. This often tires them out, discourages them and basically interferes with them maintaining a clear headed approach to trading.

Trading forex based on emotional responses is typical of new traders operating without a trading plan. They may also be under the false impression that trading is easy or that little risk is involved. Of course, nothing could be further from the truth.

Eventually, a string of losers may make the emotional responses too stressful for the trader to bear. At this point, the uncomfortable neophyte trader will often proceed to take themselves completely out of the market either consciously or unconsciously by losing whatever money remained in their account.

Psychology of Successful Traders

In general, successful forex traders tend to trade with a well defined trading plan. A properly designed trading plan — when carefully adhered to — allows a trader to avoid wallowing in their emotions and any deleterious effects by simply sticking to their trading plan.

Furthermore, as a result of having their trading parameters laid out for them in advance, a trader can often take out the stressful worrying part of trading, as well as the need to make quick decisions. Instead, they can simply implement the previously devised plan without deviation in order to reap its rewards.

Of course, discipline plays a major role in doing this effectively and is one of the primary characteristics of the psychology of a successful trader.

Nevertheless, knowing when to make exceptions to trading rules and when to follow a gut feeling instead also makes up an important part of trading psychology, as does knowing how and when to implementing appropriate money and risk management techniques.

The Essentials of Successful Trading Psychology

The essential psychological elements of a successful trader therefore come down to following general trading guidelines such as:

§ Having a comprehensive and profitable trading plan

§ Keeping a level head, not to get emotional over trades

§ Always have stop loss orders in when holding positions.