Trader’s Psychology, or What Forex Trading Plan is About
Besides following key financial news and currency rates, there is another important component to the success of a forex trader. It lies in the psychology of a trader, and the ability to make the most of how human mind works. While the basic rules for a forex trader are ‘Don’t panic’ and ‘Never invest more than you can afford to lose’, there’s a bit more to know about trader’s psychology.
Many forex trading textbooks recommend that every trader starts with a trading plan. While having a trading plan and sticking to it is crucial for professional forex traders, Harborx makes things easier for beginners. You can start little without any trading plan and simply follow Harborx Stars for your first positions. Yet, whenever you decide to dive into bigger trading amounts and more advanced strategies, it will be beneficial for you to understand what a trading plan is.
What is a Forex Trading Plan?
A trading plan is a systematic trading method, a strategy, set by an individual trader in order to evaluate assets, return and risk. Thus, a trading plan includes a trader’s strategy, risk management, money management and trading rules.
A trading plan is is basically a guideline that the trader himself has created in order to follow those rules by discipline so that he can achieve his trading targets.Whatever the emotions the trader may be overcome with, this person cannot deviate from the rules, raw trading and strategy rules must be followed every single day in every single trade in order to have successful trading results. The importance of a trading plan is that it lets you know if the trades are in the right direction or not. As renowned fund managers state, “the trading plan you use is not as important as having a trading plan.”
The Forex Trading Plan Should Work With Your Personality
A trading plan should fit your the personality. If you do not feel comfortable following your own plan you would most likely fail. You do not have to challenge yourself, just make yourself comfortable and you would see that you would trade with less stress and more confidence, which usually leads to profitable trading. Be sure to read this post about most common trading strategies to see which one is right for you. For example, if you cannot sleep with big trades open, then long-term trading strategies wouldn’t be the best choice for you.
Recently there is a new science called “Behavioral Finance”. Those scientists are trying to identify the behavior of investors and traders and see behind the market efficiency theory. In economics, we assume that traders are rational human beings who do not act irrationally and always control themselves. Behavioral finance focused on studying traders’ psychology and identifying several syndromes that are far from “efficiency” and “rationality”. An example is the tendency of humans to go with the flow and the insecurity they feel while standing alone against the crowd.
For example, imagine yourself going long on EUR/USD, you are really happy for your trade since it qualifies all requirements of your trading plan and is profitable at the moment. Then suddenly you see that all of your friends are short on EUR/USD and they all deride you because “you are so stupid for going long”. Would you feel a bit uncomfortable? Perhaps you would even close your trade and follow theirs? That is an everyday example of behavioral finance and the irrationality of human beings. Your psychology plays a huge role in your trades, be careful so that you can choose a trading plan on which you would feel comfortable enough to stand alone against the crowd, as well as trade in a way you’re comfortable with.
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