Psychology of the forex market
The psychology of people’s behavior is the key to understanding what is happening in the financial markets. All the usual, everyday feelings and aspirations manifest themselves in tough market battles like a chemical solution on litmus paper. Feelings to all of us – fear, greed, hope, etc. – in a rapid rhythm of exchange trade have a sometimes decisive influence on the behavior of the trader. Weak and self-confident, greedy and slow, all these people are doomed to become victims of the market. Knowing your own abilities and preferences, positive and negative qualities can help to avoid ruin. If you add to this the ability to adequately assess the psychological state and the corresponding behavior of the market crowd, then success is guaranteed to you.
The driving force that makes us work in speculative financial markets is greed.
If your greed is insignificant, then you will make little deals, missing many good moments. In this case it is recommended to engage in another type of business, more calm.
If your greed knows no boundaries, then you will try to conclude as many transactions as possible, exposing yourself to the risk of unclear prospects. Better play in a casino, it will be closer to you by nature and cheaper for a purse.
The result of the action of greed will be motivation to conclude deals.
There are two types of motivation:
• rational motivation – usually present before the first entry into the market for a young trader, as well as in the work of a professional trader;
• irrational motivation – is expressed in the gamble of the player and there is almost every trader, but some control their excitement, while others are slaves of emotions and doomed to lose.
Identify, under the influence of greedy excitement, you play or not, you can use the following signals. If the trader asks the others: “What do you think about this?”. If he tells others about his open positions. If the trader does not have a work plan drawn up before the conclusion of transactions – all this indicates that this person works, most likely, under the influence of excitement, and not reason. The best medicine for excitement is the preparation of a transaction plan (financial plan of activity).
Hope and expectation
The next factor that moves a trader to conclude deals is the hope of making a profit. Naturally, the meaning of any work is to make money. However, with the prevalence of hope over the calculation, you risk overestimating your own abilities in analyzing the situation and turning a small “fly” – a reality into an “elephant” – a dream. Hope must be subordinate to both calculation and greed. It is a great hope that leads novice traders to ruin.
Hope defines the trader’s behavior in two main cases:
• at the time of entering the market. Only the hope of making a profit can force a person to make a concrete action in the financial market;
• at the time of receiving losses, when there is a hope for a change in the situation for the better. Here, hope passes through three stages of its development and existence.
At the first stage, when losses are insignificant, hope is inevitable and can be justified (if you are confident in the forecast and act according to the plan adopted earlier).
At the second stage, with further growth of losses, the hope goes back to its peak. At this point, the trader is most difficult to separate his hope from the real actions of the market. Solving the issue of closing a loss-making position or leaving it as it is will for the most part depend on how much the trader’s mind controls his desires.
The third stage is characterized by critical losses, when hope is already leaving the trader and despair comes to her place (especially strong desperation of weak and novice traders). Most market players are familiar with this feeling of emptiness, when it seems as if the whole world is working against you. A person who has survived the last stage of hope, can safely consider himself a successful trader. In the subsequent trading practice, the events of the third stage will be felt in the form of fear.
Fear arises when you receive losses. Some fear paralyzes and they can not stop in time and lose everything. Others, however, fear that they move and conclude sometimes mutually exclusive transactions, which also usually only speeds up ruin.
At a critical moment, it’s better to do something than sit back and watch the dreams of a beautiful future evaporate along with the change in quotations. At the same time – counter the spasmodic actions of the nervous choleric patient with reasonable and planned steps to overcome the crisis, do not panic. Act clearly according to the plan you prepared before the opening of the position (respectively, before the onset of fear).