Lesson 3: FOREX Psychology

A quick recap of Lesson 2: Every trade MUST have a Stop/Loss (S/L) that is in accordance with your Risk settings. Generally the bigger the risk, the bigger the reward (and the bigger the potential to lose BIG).
 
Now that you have reflected on the risk you are willing to take on your investment, lets begin Lesson 3 by looking at the FOREX trader psychology. In terms of psychology advice, it is helpful to understand what happens as a trader puts a request for a trade. Once the trade is opened people usually start caring a lot more about the price movement because their money is now on the line. Nervousness, uncertainty and pessimism are all forms of negative energy that are materialized in your thoughts and actions and this negativity is usually translated into a pre-mature decision. In reality, any situation where a trader is panicking about a 5-10% drop can be avoided if you open a trade with two numbers in mind: your exit point and a Stop/Loss. A trader should strive to materialize their inner positive energy externally in order to achieve a good psychological balance. I admit that it is easier said than done, but on more practical terms it means that you should see things for what they are based on facts such as indicators, past performance and dominant trends. Anything else that is external to this process such as emotions and other people’s advice who are not familiar with your particular situation (like uninformed friends, family or Jim Cramer type of self-proclaimed financial guru's) should be left on the outside of your decision. Because every trade is unique with its Take/Profit (T/P) - Stop-Loss (S/L) settings and how much risk you are willing to allocate into a trade, reaching a premature decision will happen to everyone. Therefore having discipline with your trading strategy is a skill that you must always be self-aware.
 
As I have mentioned before, if you are a FOREX newbie I recommend that you fund your account with USD$250-1000 depending on your financial situation and let a Forex Robot drive your investment while you gain valuable experience on a demo account. By testing out your own strategy on FOREX using a demo account you will probably get to a point where you feel like you can make decent gains by incrementing your risk. At this stage, because this demo account uses virtual money you might not care as much if you make a mistake or a bad call. Use the demo account to test as many different strategies as possible because when you put your real money into the account you will need the discipline to keep your trading strategies methodical. For instance, I once recognized a chart pattern and followed a fibonacci strategy. My Stop/Loss was set to 10% and the currency pair ended up dipping another 13% before it reversed trend as the fibonacci strategy had predicted. I learned that my timing was a bit too soon as the currency pair oscillated in between the .500 and .618 level of the fibonacci series. Had I waited until it cleared the .618 level I would have made a correct (and profitable call). Moreover, I learned that I should have waited altogether until the pair had retraced to the .618 level before making the trade. But at the time I was more concerned with my account that I did not make the choice to take in more risk. This is exactly why I say that its tricky to trade FOREX on your own right off the bat and you are better off letting an Expert Advisor take care of your account initially.
 
So he number one thing to keep in mind as you prepare yourself psychologically to enter FOREX is the losing component. You must be conscious of the fact that you WILL lose some capital on FOREX sooner or later. In fact, with a risk setting of .1 (10% of your investment) one losing streak of 5 or more bad trades is likely to drain your account or make it almost impossible for you to recover your lost capital. Treating your money as if you had already lost is a similar mentality as if you had taken your money to a casino. To my knowledge there are no real strategies that can enhance your chances of winning. The house ALWAYS has the upper hand. So, unless you would like to gamble your money away, I'd strongly recommend that you invest sufficient resources in order to learn how to apply different trading strategies.
 
When establishing your trading strategy, I'd recommend that you look for the dominant trend in each short, medium and long term chart. The dominant trend on a long term chart will indicate where the value of the asset is going, meanwhile the short term chart will usually indicate the oscillations for which the value of the asset will pass through before reaching the long-term value.
 
Each person’s trading strategy may vary depending on the amount of time you are willing to allocate. A half-hour to one hour trading strategy will not capture as much developing information as 3 hour, or multiple trading sessions throughout the day. I personally recommend that you monitor the currency pair every 5-7hrs, and what I mean by monitor ranges from: filtered news articles, international news on Reuters/Bloomberg/NYTimes, any major price fluctuation along with the Indicators which predicted such a change and the level of your key indicators used in your strategy. A 15 minute monitoring session can be more than sufficient for you to have a grasp of where the market is going. I would recommend that you make an excel sheet and write this information down and then each week start filling out a new spreadsheet (just make a new sheet within the same excel document). By doing your homework, you will be able to lower the amount of trading time that you need to allocate in order to reach your investment goal. In the beginning I would recommend 1-2 hrs of trading, twice a day, but not immediately after the other. As you pick up trading experience, you will notice that you may achieve the same results in a significantly lower amount of trading time.

Stay tuned for Lesson 4 where I will note the major terms you should familiarize yourself with before reaching a Winning Strategy!

Mateus 

Villanova BSEE

U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.