Forex psychology

Forex psychology

Establish and honor stop-losses to protect your money. When the stop loss is triggered, act immediately, don't have second doubts. Avoid holding on to a losing position because you "hope" that things will turn around. Falling stocks will usually continue to fall until something positive happens to arrest the decline. You could get wiped out waiting for that magical moment. Get out of a bad trade and use the money to execute a different trade.

Cut your losses early and Let your Profits Run. Most traders violate their predetermined plan and take their profits before reaching their profit target because they feel uncomfortable sitting on a profitable position. These same people will easily sit on losing positions, allowing the market to move against them for hundreds of points in hopes that the market will come back. In addition, traders who have had their stops hit a few times only to see the market go back in their favor once they are out, are quick to remove stops from their trading on the belief that this will always be the case. Stops are there to be hit, and to stop you from losing more then a predetermined amount! The mistaken belief is that every trade should be profitable. If you can get 3 out of 6 trades to be profitable then you are doing well. How then do you make money with only half of your trades being winners? You simply allow your profits on the winners to run and make sure that your losses are minimal.

Do not over trade. One of the most common mistakes that traders make is leveraging their account too high by trading much larger sizes than their account should prudently trade.

Leverage is a double-edged sword. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1-10 leverage or never use more than 10% of your account at any given time.
Trade only trend. It even does not important what time scale have you been using! The only difference is in stop-loss/target size: trading with longer-term trends requires large stops as well as larger potential targets. The most common trader's mistake here is in trying to follow larger scale trend with more comfort shorter stop-loss.

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