The Importance of Trading Psychology

Perhaps the most important aspect of Forex trading is not mastering the technical skills but understanding and controlling the psychology of trading. Understanding your own trading psychology and how trading psychology is likely to affect others can give you the all important edge in Forex trading.

Simply explained,trading psychology involves an understanding of the emotions at play in the trading environment as well as being able to exercise quick decision making and maintain discipline.

At a fundamental level trading psychology starts with a thorough understanding of your own trading psychology. Every trader’s trading psychology will be different and be determined by such factors as happiness, pride, anger, impatience and fear. A successful trader will have a deep understanding of their emotional triggers and emotional biases likely to affect their decision making. They will have put in place strategies to take emotional bias out of their decision making. By minimising these emotional risks, the trader is much more likely to make decisions that will be profitable.

Perhaps the two most difficult emotions to contain in the trading environment are fear and greed.

Fear is a natural reaction to a perceived threat and a trader will encounter fear at some time or another. This could typically happen when bad news hits about a particular currency or the trading environment in general. The knee jerk reaction to a scary situation such as this is to bail out of the situation without taking all factors into consideration. The “flight” response may protect the trader from further losses but it could also prevent them from taking a position that they could profit from.

Understanding what is likely to spook you and being prepared for that eventuality in advance will help you to think through the situation logically and respond accordingly without falling victim to an emotional trading response that you may later regret.

Greed is another factor that needs to be understood and guarded against. It is a very human trait to just want that little bit more from a position and to hang on until the last minute.While the emotion is understandable it presents a grave risk to profitably trading as the more your decision making is fuelled by greed, the greater the risk becomes of being caught by a change in the market that will wipe out your profits and then some.

Understanding trading psychology is one thing, recognising it and reacting to it in the heat of the moment is quite another. That’s why good traders always establish a set of trading rules that they will follow. These rules would take into account the traders personal risk tolerance profile and include such strategies as setting profit targets and stop losses to eliminate those psychological triggers that can affect the traders psychology.

While Forex trading requires a degree of analytical skills and up to date knowledge, the importance of understanding and using trading psychology cannot be underestimated. The USGFX education centre features the USGFX trading course which covers the psychology of the trader in some detail. After completing the course you will have the opportunity to put the theory into practice and benefit from personalised one on one support and coaching. If you are interested in Forex trading there is no better place to start than with USGFX.

Source   Presented by USGForex Columns
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