Posts Tagged ‘Psychology’
The Psychology of Forex Trading: What is Your Frustration?
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Day trading currencies on the foreign exchange can be an exhilirating ride once you have the fundamental and technical knowledge necessary to learn this rewarding skill. But the technical side of Forex is only half the problem, the answer to which is (fortunately) readily acquirable all crossways the world wide web and in countless investment books. Unfortunately, the psychological aspects of currency trading are not as popularly discussed (for some reason), but just as important, if not more important, than technical and fundamental analysis. If you are a newbie or intermediate trader, you might have come to this conclusion independently, which is why you might be reading this material.
In a single word: Frustration. If you’ve heard it said, “Don’t trade with your emotions,” that in and of itself is a frustrating comment. You might be dealing with emotions you never thought you had, absolutely unable to turn them off. Frustration is the primary emotion felt during trading.
Greed and Fear. Frustration branches into greed and fear. Greed because you might be posting profits, just not as much as you would like. Fear because of the losses you might be accumulating, instead. How you deal with YOUR greed and fear will determine your success.
The Secret? You will not be healthy to quiet your emotions while you trade. The most you can hope for is slicing them off just long enough to make an neutral decision before you are filled with those emotions again. Therefore, don’t get upset if you are unable to keep your emotions quiet while you are day trading. It happens.
The Answer? Develop a system that keeps your decision making process as separate as doable from your feelings. That will be entirely your responsibility, but here are some tips:
Do not use up your margin. Trade a single lot for each to guard against unpredictable directional changes.
Hedge your trades. Make two trades that go in opposing directions (not the same currency pair) so that you will be posting a profit while at the same time posting a negative.
Do not close out negative trades. Unless you have the confidence to stomach the losses. Only trade out proftiable trades. Wait for the negatives to become profitable, even if you have to hold on to a trade for weeks.
Close out profitable trades as soon as they become profitable. You can always jump back in if you want to make more. Don’t let your winners become losers.
Don’t make the mistake of sitting in front of the personal while you trade. Make the trade, and then achievement away. Peak trading times will be 9:30 AM EST to 12 Noon EST, 7:30 PM EST to 10:30 PM EST, and 3 AM EST to 8 AM EST. These are when prices will most likely move big. Other than these times, trading will not be fruitful. In fact, you probably won’t have to worry about price changes at all during non-peak hours. Walk away.
Remember, the currencies move in waves. A currency pair that is moving up in a down trend, probably won’t be doing that for very long. Stay with the dominant trend.
Stick to your goals, IF YOU CAN REACH THEM! If your goal was to make and you reach it, STOP! Trade again during the next session. If for some reason your trade stalls before it hits , STOP! You can make up the difference during the next session. Don’t force a goal. If it takes 6 months to make 0, then it takes 6 months to make 0.
And finally, it will take time to develop the discipline needed to trade despite your emotions (probably a couple of years). But it’s well worth the effort. Your statement equilibrise will thank you for it.
7. Behavioral Finance: The Role of Psychology
Financial Markets (ECON 252) Behavioral Finance is a relatively current revolution in finance that applies insights from all of the social sciences to finance. New decision-making models incorporate psychology and sociology, among other disciplines, to explain economic and financial phenomenon, such as erratic stock price variations. Psychological patterns such as overconfidence and perceived kinks in the value function seem to impact financial decision-making, but are not included in classical theories such as the Expected Utility Theory. Kahneman and Tversky’s Prospect Theory addresses such issues and sheds light on irrational deviations from traditional decision-making models. Complete course materials are acquirable at the Open Yale Courses website: open. yale. edu This course was recorded in Spring 2008.