Forex psychology or how to fight with the effect of wings?
Forex trading is a complicated business, which needs to be approached thoughtfully and with reckoning. Very often a trader is held hostage by his or her psychological traits. Here the most common mistake of market participants is confidence, or, more precisely, self-confidence which they develop after a series of profitable trades. Exactly at this moment traders start to think that they know exactly where the market is going to go and try to increase their lots.
But Forex does not forgive such mistakes! As a rule, the market moves not exactly in the direction that the trader has chosen, and the trader would have easily tolerated these spikes, but an overloaded deposit gradually leads to a margin call, forcing either to close most of the positions with a loss or to lock orders, which, in general, is not the most profitable option. So how do you fight this detrimental "trader's spiraling effect"?
Let us consider the following situation as an example. A trader decides to trade the currency pair (EUR/USD) but he had never traded it before. He is not new to the market, he is experienced and he uses the algorithm of potentially profitable forex strategy and knows how to keep his feelings under control. A few trades go well, he has a series of profits over several days. Trader's confidence in knowing the market by the European grows stronger, and he decides to increase his lot. After this, things begin to go completely differently than he expected: the currency rate begins to move in the wrong direction in light of the news. The increased lot, eats up several days profit in just a couple of hours. Of course, there is hope for the stop loss, but because of his confidence he sets it so far away that any sense in protective orders is lost.
So why did this happen? There are three reasons! First, he started trading an unfamiliar currency pair and did not bother to study and analyze the market. Secondly, he has entered too large a lot, which contrary to all the laws of risk management on Forex, and common sense as well. Thirdly, put stop-losses without taking into account possible losses also contradicts the laws of risk management in Forex.
Of course, the trader realizes almost immediately that he or she was wrong and all his or her actions were completely subordinate to emotions, and not to a trading system and reason. But success of profitable deals is so encouraging that it is more pleasant to think about near-term profit than about possible mistakes.
But it is possible to avoid such a fall. To do so, you need to adequately assess your performance in the Forex market. When trading unfamiliar currency pairs, trade with minimum lots. After a series of successful trades do not immediately increase your lot. Make sure to stop trading for a while, after a series of successful trades, not only after losing trades. Only this way you can avoid a rapid rise and subsequent fall.