Posted by Bryan Sayers on Jun 25th, 2010

Making a forex investment can wreak havoc on a person’s emotions if they fail to psychologically prepare themselves for the task. A person’s psychological reactions to winning and losing make up a key element in their success or lack of it in trading forex.

Dealing with Emotions

The most effective way of dealing with emotions while trading the forex market involves being prepared and not letting emotional reactions form the basis for trading decisions. While this may sound quite simple in theory, in practice it may be a bit more challenging.

Basically, fear and greed, which make up the two most common emotions that traders deal with, often influence trading decisions, whether the trader notices this or not. Fear of losing money in the markets is pretty much universal among traders, and greed seems to take hold of even the most disciplined traders when they are making money.

The way that seasoned forex traders have traditionally controlled their emotions has been through trading with a carefully devised plan of action. This trading plan will typically contain provisions for every possible market situation the trader may face in the course of their trading. It will also usually contain sound money management techniques to deal with risk.

Using a Trading Plan

A currency trader will typically use technical analysis techniques to formulate their trading plan. These techniques will include price charts and a number of other technical indicators such as moving averages and overbought/oversold oscillators.

The indicators used by the trader point to specific price levels which will generate buy and sell signals when certain conditions are met. At this point, the trader can choose to initiate a market position based on the buy or sell signal generated by their trading plan, and any other factors they wish to take into account.

In general, a trading plan gives the trader an objective basis upon to make trades without the emotional attachment of being either right or wrong. Also, if the trade is unprofitable, that is not the trader’s fault, but their plan’s. Keeping track of this information can present an opportunity to refine the trading plan over time.

Basically, the real advantage of a trading plan lies in the fact that the trading signals generated by the technical indicators are completely impersonal. This affords the trader complete objectivity in making trading decisions.

Managing Risk

Having a sound trading plan with a comprehensive risk management component will allow a trader to control their emotional attachment to any given trading position and will help keep emotions and risks manageable.

In forex trading, this usually means placing suitable stop loss orders to protect positions against adverse movements, as well as trailing those stops on profitable positions. Such protective measures help avoid potentially detrimental psychological tendencies due to the interference of hope or greed.

Basically, most consistently profitable forex traders have used the aforementioned trade planning and risk management techniques to control the impact of trading psychology. Furthermore, many report that it has factored considerably in their overall success in the trading arena.

One Comment to “Managing Trading Psychology and Risk Using a Trade Plan”

1. on 26 Jul 2010 at 10:14 pm1John

   Trading FX on margin carries a high level of risk and may not be suitable for all investors The high degree of leverage can work against you as well as for you Before trading FX you should carefully consider your investment, objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and you should not invest money that you cannot afford to lose You should be aware of all the risks associated with FX trading. while searching on internet i came across one such site that offers earning money by online forex trade http://onlineforexfuturestrading.com/