Forex Psyche Rule #5: Keep Focus

I've noticed I have a sweet spot in the middle of the day when I make my best decisions. It starts about an hour after I've been up and around, somewhere around the half way mark on my second cup of coffee. And on a good day this sweet spot lasts five or six hours. On a bad day, maybe an hour or two before I'm exhausted, restless and distracted.

One thing I've begun to do is an adaptation of an old studying trick from college. I work for 50 minutes - researching, trading, watching the markets, and then take a 10 minute break. I walk around, get some air, take a quick jog, anything to clear my head so that when I return, it's with new focus. It's been helping keep me from making rash decisions and from feeling so burnt out at the end of the day.

The reason for this blog

I am a new forex blogger, with a practice account for about a year, and a real money account for about three months. I have found amazing resources both online and in books that have proved invaluable for technical analysis, and I'd like to share some of these resources over time. However, far and away the harder part of forex trading to master, for me, has been the emotional discipline and patience necessary to wait for the right entry points and to get out of positions at the right time. The purpose of this blog will be to explore the psychological methods that have helped me to grow into a better trader over the last year. Obviously, I don't imagine it will be useful to experienced and professional traders, but I know there are many people in my shoes who trade as amateurs or in our spare time. Hopefully we can start a conversation and form a supportive community.

Good Luck!

Forex Psyche Rule #4: Everyone Loses

Even the best financial analysts are not pychic. Everyone loses in Forex. The successful traders know when to cut their losses and when to protect their gains. If you get too proud of your entry points, you'll stay in positions too long. If every signal is working against you except "your gut", GET OUT and minimize your losses before you lose everything.

Rule #3: Education = Confidence

Before you make a trade, take an extra five minutes, check the technical analysis. Do the experts agree with your analysis? I'm not saying they're always right, but I tend to assume they know more than I do. I'm not saying I've never made a lucrative trade against expert advice, but I make it knowing that it's perhaps a little riskier than my other positions and I watch it more closely. Educating yourself with earn you an extra bit of confidence in your position, and allow you to both enter and exit trades at stronger positions.

Rule 2 - Play it Safe, Use Protective stops

Whether you're protecting yourself from massive devastative losses or you're protecting profits you've earned, protective stops will help you sleep better at night. The worst thing that can happen for your psychological state while trading is to suffer sudden, massive losses.

Recently I had wood floors installed and one of the installers looked at my computer and was like "oooooh, forex." And told me this horror story about how he lost $10,000 in a margin call right after Hurricane Katrina. How many traders (or former traders) have the same story?

If you loose significant portions of your equity in a big price swing, or in a margin call, you have no one to blame but yourself. I always put a stop at 2.5% of my total account value whenver I place a trade. Make it part of your trading strategy to never never NEVER place a trade without a stop, and never have to go back to installing floors for Lowes instead of making your own money.

If you've stopped using stops because you kept running into them, a little more tough love: if you're constantly hitting your stops, you're either setting them too close, or - more likely - you're choosing the wrong entry points.

Forex is like sex, it's more fun if you play safe!

Forex Psyche Rule #1: Stay Calm!

The forex markets don't have emotions, but they are influenced by the emotions of millions of traders around the world. By staying calm and keeping your wits about you, you can take profits when possible and get out of bad positions before they take down your entire account.

If you find yourself irritated, agitated, terrified: close your positions in the best way you can (or put in appropriate stops) and walk away. Get some air. Go for a run. Placing poorly planned orders in an attempt to regain lost funds will most likely backfire. If you're not calm, rational and patient, GET AWAY FROM YOUR COMPUTER.