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Trading Psychology

Psychological Pitfalls in FX Trading

Forex trading can be a risky business. As traders, people have two kinds of mindsets; one that is bent towards speculation and the other that is bent towards hedging. “To each his own” is the all-important adage of forex trading. Now, there are those typical practical pitfalls that make a trader err but then there are quite many psychological pitfalls as well.

Few traders are conservative by nature but then there are others who want to make money at a premium and that too very fast. While a stock trades with high volatility, it is important not to get way-laid by a dealer or broker. He would try to lure you towards positions of high speculation. But you need to know your stop-losses perfectly. Precision exit and precision entry is truly the name of the game. Think of it this way. While the news or an important economic release is out, market becomes very volatile. At this point it is important not to be driven towards impossibly risky positions. This is one error of trading psychology that costs a trader a lot.

Next, there is the leverage thing. High leverage entices a trader towards it but the actual base strength, margin and the stability of a currency must be dealt with properly prior to making a pip call. Increase leverage as your experience and expertise increases. While margin trading can be pretty luring with the idea of playing $ 10000 with $20 – $50, it’s also a little dangerous psychologically with the greed factor coming in.

Now, over-conservative stop-loss placement is another psychological pitfall faced by very cautious traders. A currency placed at a tight stop loss might reach a point below the tight-cornered stop loss and then bounce back to give great profit. This is where such traders feel the burn.

What’s the commonest pitfall for a trader? In the event of losing a trade, he begins to blame the system. He thinks that the trade has gone miserably wrong because of the system. Now, making a mistake is perhaps the most vital part of trading so don’t blame the system even if it’s a forex robot which does not require human interference. Blame yourself and do not repeat the mistake. This way you can trade at a level higher and better next time with minimal errors.

Also very important is precision exit points for a trade. If you are losing in a particular day trade, close it, think of it as a misadventure and then look for the next one. Do not keep tied to it thinking that it will reverse and bring you a small fortune? Contrarily, do not get out of winning trades because you have already earned and the anxiety of a reversal is too high. Test your anxiety against the truth and may be you will understand that the trade needs to be lingered with just a little more.

Tackling few of these psychological hindrances can make you a better trader and many would vouch for this statement.

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