Forex Psychology

“The road to success is paved with a few losses, you must be confident enough to accept the losses on your way while juggling risk.”

Understanding psychology is as important as studying the market. Have you heard about Long-Term Capital Management L.P. (LTCM)? Two members of its board of directors, Myron S. Scholes and Robert C. Merton, share a Nobel prize in Economics. After three years of tremendous success, LTCM lost 4.6 billion USD in four months! How could such smart people lose that much money in such a short time? The answer is the mind!

Your Psyche

The key to success in forex trading is your psyche, as much as it is your study of the market. The first step is identifying with the “four demons” of trading: Greed, Fear, Euphoria and Panic. These fickle “demons” cripple forex traders as sure as any accident would. Striking a fine balance between the “demons” results in a logical approach to forex trading, as emotions in trading psychology affects our trading decisions.

Trader Personality Type

The next step would be to identify what type of trader personality you are. Dr. Van K. Tharp, a professional psychologist, profiled the personalities of forex traders. Dr. Tharp came up with fifteen different personality types and he offers a trader personality test on his website for free, so that you can take it to know which trader personality type you belong to. Knowing which personality type you are, helps to assess your psychological fitness for the forex market.

Self-Confidence

Finally, a forex trader has to be self-confident in his success trading in the market, while balancing this self-confidence with risk management. The forex market is a volatile one and profits could easily become a loss and vice versa. The road to success is paved with a few losses, you must be confident enough to accept the losses on your way while juggling risk.
In conclusion, the trader’s psychology needs to be free from emotional prejudice and it must attack the forex market from a logical standpoint. Studying the market and having a good psychology is the recipe for success!