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A Forex trader’s psychology

Psychology of human behavior is a key to understanding the things that happen on financial markets. All the usual everyday feelings and aspirations show on harsh market battles like a chemical solution shows on litmus paper. All the sensations typical of us, like fear, greed, hope etc sometimes have deciding influence on Forex trader’s behavior in the fast pace of exchange trade. Weak and self-confident, greedy and slow, all these people are doomed to become the victims of market. Knowing one’s skills and preferences, positive and negative traits will help to avoid bankruptcy. If you add also the ability to evaluate psychological state adequately and understanding of the market crowd’s behavior, your success is guaranteed.

Greed
Greed is the driving force which makes us work on speculative Forex markets. If your greed is insignificant, you will be arranging few deals, missing on many positive moments. In this case the recommendation will be to try other kinds of business, less frantic. But if your greed is boundless, you will be seeking to arrange lots of deals, exposing yourself to risk of unclear prospects. You’d better play in casinos in this case, it is closer to your nature and cheaper in terms of money. The result of greed will be motivation to arrange deals.

Let’s point out two types of motivation:

  • rational motivation is possessed by young Forex traders until their first entrance to the market, and also in the work of a professional trader
  • irrational motivation brings about the heat of the player and is possessed by most of the traders, though some control their excitement, while others are slave to their emotions and are doomed to lose

    • To find out whether you play because of greedy heat or not is possible with the help of the following signals. If a Forex traders asks others what they think about, tells about his open positions, if he or she has no working plan made up before arranging deals, this tells that this person works most likely under the influence of heat but not rational mind. The best cure against this heat is making a plan of arranging deals (a financial plan of activities).

    Hopes and expectations
    The next factor which makes a trader arrange deals is hope to earn profit. Naturally, the essence of any work is in earning money. Though, if hope prevails over rationality, you take the risk of overestimating your abilities during situation analysis and making a mountain of dream out of a molehill of reality. Hope must be subordinated to rationality and greed. It is hope that brings beginner traders to bankruptcy.

    Hope defines the behavior of a trader in two main cases:

  • in the moment of entering the market. Only hope to earn profit may make a person make a concrete action on the Forex market
  • in the moments of having losses, when hope for the better appears. Here hope passes through three stages of its development and existence. On the first stage, when the losses are minor, hope is inevitable and can be justified, if you are sure about the forecast and act according to the plan made up earlier. On the second stage, when losses increase, hope reaches its peak. In this moment a trader has the biggest problem separating hope from real Forex market activities. The decision where to close the unprofitable position or leave everything as it is will mostly depend on the extent to which the rational mind controls the desires of a trader. The third stage is marked with critical losses occur, hope leaves the trader and despair comes to replace it, which weak and beginner traders experience most strongly. Most of the market players are familiar with this feeling of emptiness, when the whole world seems to be working against you. The person who has overcome the last stage of hope can be sure that he is a completed Forex trader. In the course of his further practices the events of the third stage will show themselves in the form of fear.

    • Fear
    Fear appears when you face losses. Some a paralyzed by fear, they can’t stop when it’s necessary and lose everything. Fear makes others move and arrange at times mutually exclusive deals, which also usually makes bankruptcy closer. In the critical moment it is better to do something instead of sitting around twiddling your thumbs and watch your dreams about beautiful feature fly away as the rates change. Still, oppose rational and planned steps to make your way out of the crisis to convulsive actions of a nervous choleric – don’t panic. Act in strict accordance with the plan made up before the position was open (and before fear appeared).

    This entry was posted on Tuesday, September 20th, 2005 at 12:11 pm and is filed under Forex. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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