Psychology of Speculation in the Forex Market

Definition of Speculation in the Forex Market

Speculation in the foreign exchange market involves buying and selling currency with the aim of making a profit. It is called speculation because of the uncertainty involved because no one can say for sure whether the market will go up or down. Traders assess the possibility of any of the scenarios before trading.

Tips to Speculate Like a Successful Trader and Get Back on Track

Don't Let Risk Change Trader's Behavior

The biggest psychological barrier for traders is the perception of loss. For traders, the pain of closing a trade and realizing a loss outweighs the joy of making a winning trade of the same magnitude.

Reputed traders, first and foremost, apply sound risk management. Traders can win two thirds of all traders' trades and can still blow up the account if there is no termination. The natural consequence of this is that the trader lets the losing position run, while taking profit as soon as the position turns positive. The losses outweigh the gains and this should never happen.

One way to manage a trader's emotions is to apply a trailing stop or manually move a trader's existing stop when the market moves in the trader's favor. This way, the trader can relax knowing that the trader is breaking even and any further movement in the trader's favor is pure profit.

Before trading, know what level of risk the trader is ready to take and make sure that the risk to reward ratio is at least 1:1.

Bring a Positive Mindset To The Charts Every Day

Since traders are bound to suffer losses in this forex speculation game, it is important to deny these losses from changing the trader's frame of mind.

Traders will often experience the disappointment of being discontinued and this can be very disappointing. As a result, traders take shortcuts to trader analysis or question the trader's own approach. This never ends well.

The key to maintaining a positive mindset in trading is to view losses the same way a business owner views expenses; just as the cost of running a business. Because once a trader has learned to lose properly, and once a trader has learned to keep those losses within the scope of the bigger picture - the trader has covered the biggest aspects of trading psychology.

Find the Balance Between Fear and Greed

These two drives can have a profound effect on how we live our lives; and not only in trading. When trading, fear and greed can be very detrimental, as they can cloud a trader's judgment and lead to bad decisions.

Most humans will become greedy when a trader loses; willing to hold on if only the price can return to the trader's initial level. And when in a winning position, most humans will start to fear.

Traders should try to reverse these drivers and get greedy when they are proven right. If afraid, traders can use break-even stops to help reduce concerns that the trader's initial risk is still exposed.

Don't Let Confidence Rule Traders

After accumulating a string of successes, it is human nature to build trust around a trader's dealings and this can be a good thing.

But once a trader has entered 'overconfident' territory, risky habits may sneak into their approach, nothing more damaging than the desire to bend a trader's own trading rules just because the trader feels it will work.

Therefore, traders should always try to find a balance between fear or fear, and overconfidence.

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