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PSYCHOLOGY OF THE TRADER

What should the psychology of the trader be?

Before placing trades, traders must sufficiently analyse the positions they are about to take.
However, many do not thoroughly plan out their actions and instead make trades based on guesses
and hunches. This can results in traders losing a lot of money very fast.

How to Avoid Falling in a Trap

Through careful planning and analysis, including knowing where to place Stop Loss and Limit Orders,
a trader can keep losses to a minimum while allowing profit to run. Make sure to have a plan that
utilizes stop and limit levels before making the trade in order to minimize losses and lock in profits.

One huge psychological error that many traders make is going against their original plan, either by
closing positions to take a profit before they reach their original profit target or by failing to close a
losing position in the hopes that the market will swing back in their favour. Another psychological
error traders make is to believe that, with patience, every trade can turn out to be profitable. If
there is an instance where a stop is hit, and then the markets goes back in favour of the position the
trader had held, this belief can cause the trader to remove stops from their trades.

What is often forgotten is that stops are there to keep traders from losing more money than they
would like, not to act as roadblocks against profit. It is okay to hit stops and lose a pre-determined
amount of money because when a trader lets profitable trades run, the loss will be made up for and
more. Professional traders never try to improvise and nor should anyone new to the market. Stick
with your original plan and always follow the precautions you put in place before the trades.

A third important psychological error traders sometimes make is to become too committed to an
individual trade and unwilling to let it go, when this is advisable, as a result. A trader must keep their
original analysis in mind when seeing the result of a trade and be objective about what is happening
to their position and what they should do about it. However, many traders attempt to analyse the
position differently from the original analysis so that the analysis will favour their original position.
They intentionally distort their analysis for one of two reasons, they do not want to close the
position with a loss or they are hoping that the position will become more profitable than it already
is. This psychological viewpoint causes many traders to lose the profit that they had made, or to lose
more than they originally would have lost.

A mistake made by many traders is over trading, meaning that they trade much larger amounts of
their account than is reasonable or trade too frequently. Although leverage allows traders to trade
one lot of currency with only $1,000 as a margin deposit, it does not mean that traders should trade
their entire available margin in one or two trades.

The psychological mistake they are making is that they are thinking of their trade as a $1,000
investment, when in actuality it is a $100,000 investment. Although most traders perform adequate
analysis of currencies before placing trade, they sometimes use too much of their margin and are
later forced to exit the position at the wrong time. A general rule that traders can try to follow in
order to keep from getting over-leveraged is to never use too much of their account at any given
time, keeping enough margins available to cover your positions is critical to successful trading.