The Role Of Emotions In Forex Trading

by

Emotions have no place in forex trading. If you depend on your gut feelings you are certain to lose unless, of course, your gut is an expert in trading strategies!

Your trading decisions must be based strictly on your understanding of the past and current market trends, and the strategies you have developed based on this. The currency market is highly volatile, subject to sudden and frequent fluctuations in currency prices. It is natural that this will cause extreme swings in one s emotions. However, you should stick to the trading strategy you had worked out earlier even when emotions run high. The only winning mantra in forex trading is to have a strategy, analyze the market, and to patiently persevere in your efforts. Failure to follow these golden rules will only result in losses.

Going by what you feel is a losing proposition. You might ask how can acting on one s gut feeling be so disastrous. Decisions made based on emotions affect your trading in several ways. Expert traders will always tell you that you must develop a trading strategy or system, and keep to it irrespective of whatever happens when you trade. The system will tell you when to make the trade, what currency to buy, and what price to use for your entry. This is the only sure way to make the most profit. In sticking to your system you might feel that you are going against the data that you see. But be assured that there is no other way of maximizing your profit except by strictly keeping to the system that you have determined to be profitable.

If you are new to forex trading, be aware that the most powerful tool you can use is a system based on the prevailing market trend. Experienced traders always make use of this and they make huge profits. These experts will tell you that when your gut feeling is contrary to your system, it is the system which will be the winner, and not your gut feeling.

Perseverance is an important factor. Market trends do not progress in a smooth line upwards or downwards. They trend to be spiky line with dips and spurts. However, within these jumps and dips it will be possible to see a pattern. Outside factors sometimes cause sudden plunges or upward spiraling. If the currency you are trading in takes a sudden nose dive, all you may want to do is to cut your losses and quit trading. But if your system tells you that you should keep trading, do not give in to your panic attack. Similarly, if you become exuberant when the value of the currency you are trading starts going up, and want to buy a lot of it, you should follow your system which will tell you when to maximize your profit and when to stop trading.

A mechanical system will help you keep emotions out of trading because it will not be have panic attacks or become exuberant, or be hopeful that a run of bad losses will change. A mechanical system does away with emotional involvement in trading, a major factor that causes heavy losses. A successful system, whether it is your own or someone else’s, will tell you when to trade and when to quit. It will also give you the mitigating factors, and an exit strategy.

Let s summarize with a trading system example:

When should you buy currency? When a currency drops more than five pits, your analysis will give you a buy order.

When should you trade one currency for another? You exit trading either to maximize your gain or minimize your loss. This will be indicated respectively by the take-profit or stop-loss orders set in your system.

What factors permit changing a decision? Though forex market moves in predictable patterns, there are always variations of a trend within a pattern. When you consider these variations you will know if they would really make a difference. This is where wishful thinking can come in if you allow emotions to interfere with your trading.

How will you trade out of a currency? Your exit strategy will give you a simple stop-loss order when your loss reaches 5%, or a take-profit order when your profit reaches 40% In other words, your system will tell you when to start trading and when to keep on trading, and when to quit, and your emotions will have no chance of playing havoc with your trading.

Filed Under: Forex Articles Tagged With: , ,

The Impact Of Interest Rates On Forex Trading

by

The foreign exchange market, otherwise known as the Forex market, is an increasingly popular form of trading which is driven by several factors. In the past, the Forex was a market primarily reserved for the wealthy; but lower minimums have recently made it more accessible to investors at all financial levels.

It is attractive to investors for a variety of reasons, which include its liquidity, its ease of leverage, and its potential for earning investors high returns. However, in order to capitalize on the investment potential of the Forex market, the investor must first understand the factors which affect the market, in order to make rational, logical, and considered decisions on investments. A key factor which affects the Forex market is interest rates. While the market is concerned with currency prices, the prices themselves are directly affected by interest rates.

In order to understand and capitalize on the current foreign exchange market, the investor must first understand the current conditions of individual interest rates. No single factor has a greater impact on currency prices than interest rates — when interest rates rise, investors seek to capitalize on high returns, so money flows into the country; when interest rates fall, investors pull out in order to protect their investment. Rising interest rates signal to investors that a country s currency is stronger in comparison to other currencies; consequently, investors seek more of that currency in order to increase their returns.

Interest rates, however, are not the sole factor in driving the foreign exchange market. Another key factor in the foreign exchange market is economic forecasting. Experts in economics often attempt to predict what the foreign exchange market will do, particularly in regard to interest rates. These experts watch economic inflation indicators for signs of growth and decline; as well, they scrutinize the speeches and press releases of politicians and influential people, in an attempt to anticipate changes in interest rates. Predictions of interest rate increases and declines can then lead aware investors to anticipate changes in the market and act accordingly.

A third factor in the Forex market is the participation of governments. A government may decide to flood the market with its domestic currency; on the surface, this action may seem foolish, but to the wise investor, it signals an attempt by the government to lower the price of the currency. Conversely, when a government purchases its own currency, it is attempting to raise the price of that currency. This strategy is known as Central Bank intervention, and governments engage in it primarily to assist the country s overall economy. It is this type of action which keeps the foreign exchange market strong and steady, and an attractive investment opportunity for the astute investor.

Interest rates have a strong influence on the foreign exchange market, and help determine the relative strengths of each country s currency in comparison to other currencies in the market at any given time. It is important for potential investors to remember that when the interest rates rise, it is a good thing for investors and domestic currency; when the interest rates fall, it typically signals a downturn in domestic currency and a lull in the market. Should the market stay flat for an extended period of time, it often spurs the government to intervene in the market, which then will commonly revitalize the market. Any investor seeking to understand and invest in the foreign exchange market needs to understand the impact of interest rates in order to make the most beneficial investments.

Filed Under: Forex Articles Tagged With: , , , , ,