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Thursday, January 9, 2014

Approaches to trading in the foreign exchange market

Just as people differ in how they live, so too, there are no two exact approaches to business and investing. A person’s personality contributes to the success of his business. There are those who will throw everything they own into a business in order to make it thrive and they are willing to take on the risks involved in order to win big. There are others, however, who are more guarded. They spend time researching, learning and waiting patiently for the right opportunity before making a move.

Foreign exchange trading
Forex trading uses adaptive decision making
Analysts in Forex trading psychology have found that there are two types of traders: the risk takers and those that are more vigilant. The risk takers don’t hesitate to jump in when they see the possibility of realizing great profits in a relatively short period of time. They understand that they might just watch their money plummet at an even faster pace. By their very nature, these traders follow their instincts and are willing to try out new strategies if they believe they will win big at the end.

The more reticent trader follows a different strategy. Gambling with his money is not his style and he will never place a trade without first doing as much research as he can. Then he will follow his own custom system of trading in hopes that it makes him some money.

Forex trading psychology

When considering forex trading psychology, it is important to understand the thought processes which come into play by the different traders in the forex game. Neither one of the two styles of trading discussed thus far would be considered the ‘right’ approach. And it is not always the case of beginners being overly cautious while experienced traders end up taking risks. We find both novice and professional traders falling into each category.

Each according to his ability, as the saying goes. If you are a ‘stalker’ who prefers sitting back and waiting till you are 100% certain that your trade will produce the optimal results, then that is how you will trade. You will watch the market, read the graphs and follow the trends. You will study the fundamental factors that contribute to currency prices and will wait patiently for the ‘go’ signal. In short, you will employ both fundamental and technical analysis before placing a ‘buy’ or ‘sell.’

If, on the other hand, you are among the ‘foragers’ who envision making large profits in the shortest possible time, you will be willing to assume the risks in order to reap the rewards. You can be expected to speculate on currency prices, deliver predictions based on instinct and leap right in at a moment’s notice if you see a breakout or a sudden change in the market. You might also know to pull out should you see the currency reaching its peak price or dropping to its lowest level. These decisions may not always turn out to be the best ones, but you are willing to make them nevertheless if you believe the end results will be in your favor.

Most people are a combination of the two types I have mentioned. At various times throughout their trading history, they will assume the role of risk taker while at other times, they will be view their moves more watchfully. This is most certainly the best strategy to take.

Image license: Evo Signals, CC BY-SA 3.0

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