Psychology in foreign currency trading- magazine Economy and Business

 

author: Sasho Trajkovski

Foreign market is a place where the money supply and demand meet denominated in one currency, which is exchanged for money denominated in other currency. Foreign market is not institutionalized. It is a network of all banks, dealers, tradesman, and market makers in the world, who make this market operable almost every day, day and night. The purpose of each participant is the same. Realization of profit.

But, how to become a successful dealer?

Even the best sportsmen miss a penal in their most important matches in their carrier. It is not because these sportsmen do not have the necessary values and abilities, but because their emotional situation has succumbed, because they experience stronger stress and failure fear. Feeling of stress and fear has high impact on the dealers in reaching decisions in foreign trading. Ability to manage the emotional situation, suppressing the fear in him/her, may largely improve the quality of decision making.

Psychology in foreign currency trading is very important. Very often the psychology and not the lack of education or skills is the reason for making errors. Trading psychology provides following the assigned goals, irrespective of the current losses.

Most of the people begin to know the foreign market with technical analysis of the charts, with historic trends of currency pairs. There after there is fundamental analysis, why some currency pairs behaved as they had in the past and how would they behave in the future. The challenge is to find the right combination of tools, which shall provide the dealer with realization of profit.

Trading is like flipping coins. Both sides of the coin have equal chances for success. But the goal is to realize as much as possible higher number of flipping coins with expected outcome or one flipping coin to be with “higher” expected value than the losses. One of the most frequent samples of instable psychological profile of the dealer is early taking up of the profit. If the trend of curve of the currency pair is favorable, it is necessary to leave the curve to work for the dealer and prolong the taking up of the profit as much as possible. This reaction is the reason for failure of a number of dealers.

Dealers may feel self confidence in their abilities and remain calm while dealing on demo account. However, it is a completely different when the trading is in real version. When the dealers are faced with real financial decisions, they succumb very easily to emotions. People are by nature directed inwardly. The ego of the people is looking for confirmation so to be evidenced that they know what are they doing and that they are better than the others. The problem is that these same dealers succumb to prejudices of exaggerated self-confidence. It is not unusual for the dealers to realize a winning serial and believe that they shall never make a mistake in future. To believe in this is certainly wrong. It is necessary to examine the steps all the time. It is the only winning way. Allow youself to make a mistake and admit the mistake instead of looking for other culprits. The fact must be accepted that the errors are inevitable, especially in the early phases. It is part of the learning process. It is necessary to practice daily trading, to write notes and research new strategies.

Before beginning with trading, the dealer must have written dealing procedures, always follow up the given procedures without exception, follow up the given stop loss points. Most important of all is the self control.

Before beginning of a trading currency day, the dealer has to take a look at the charts and see what was happening at the market while he/she was absent. Especially because of the fact that the foreign market operates 24 hours per day, almost every day in the year, and it is impossible for the dealer to be permanently active. At the beginning of the analysis, it is necessary to check the basic trend and the time frame according to which the dealer is trading. Technical analysis is made on how the currency pairs behaved in the past. After making the technical analysis, it is necessary to establish long-term trend and calculate the probability for its occurrence. Then the points of “support” and “resistance” should be anticipated, how firm these points are and create as many as possible technical formations of the chart. After the dealer gathers this information, he/she may create a strategy and plan for dealing during the day. It is important to develop a scenario for reaching unexpected decisions because the market is unpredictable. It is important to keep the capital that is invested.

 

After setting all the above said, it is important for the dealer to allocate a bit of his/her time in reading the reports by the best analytics and comments by commercial banks. More information provide clearer picture on the market.

If someone is a beginner in trading, it would be best to start with trading on demo version, and when he/she begins to trade in real application, to be under supervision of a more experienced dealer at least in the beginning. Golden rule in foreign currency trading is not to accept excessive risk, because excessive risk brings along with it a possibility for high loss, i.e. the dealer has to calculate what loss he/she may suffer.

 

 

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