The Psychology of the Individual

Summary
1. Taking responsibility of your capital
2. Cut your losses early and let your Profits Run
3. Discipline
4. Too much information
5. Do not marry your trades
6. Do not bet the farm

1. Taking responsibility of your capital
It is interesting how many people are happy to place their savings and funds in other peoples hands, accept the losses as its easier to blame someone else than to take responsibility of those funds ourselves.

The first step as an individual is believing in yourself and your own abilities. One of the most startling discoveries when you start trading or may have observed from the stock market is how many experts get it so wrong so often. This is a real confidence booster when you begin to understand that with a solid background and knowledge, discipline and a well defined trading plan that you will often outperform many professionals.

You will be in a market place that moves several times faster than any other market and with leverage, the rewards and losses compound many times. The best way to overcome the thought of using your own money and the volumes you will be trading is to forget about money and talk in terms of points. So rather than calculate your profit and losses in terms of dollars talk in terms of gains and losses in points. If you adopt this at a very early stage it will feel the same if you are trading a demo, a mini or 10 contacts of a full account.

Every trader that any member of Team Forex knows talks in terms of gains and losses in points. We don’t refer to the money as the bench mark of our own performance. We equate to other traders in the terms or losses and gains in points, and measure our performance against this.

When trading a demo account most people do very well. They trade without fear. As soon as its real money, even on mini account they suddenly find themselves trading in a manner where they miss many opportunities and accumulate many losses. They quite simply loose their nerve and give into fear and greed. This can happen also when you may go from a mini account to a full account or from trading single contracts to trading multiple contracts.

Try and trade without the thought of how much money you may gain or loose. Trade thinking of points, no matter how many contracts you are trading or even if you are trading a demo account.

2. Cut your losses early and let your Profits Run
This simple concept is one of the most difficult to implement and is the cause of most traders demise. Most traders violate their predetermined plan and take their profits before reaching their profit target because they feel uncomfortable sitting on a profitable position. These same people will easily sit on losing positions, allowing the market to move against them for hundreds of points in hopes that the market will come back. In addition, traders who have had their stops hit a few times only to see the market go back in their favor once they are out, are quick to remove stops from their trading on the belief that this will always be the case. Stops are there to be hit, and to stop you from losing more then a predetermined amount! The mistaken belief is that every trade should be profitable. If you can get 3 out of 6 trades to be profitable then you are doing well. How then do you make money with only half of your trades being winners? You simply allow your profits on the winners to run and make sure that your losses are minimal.

Another good strategy is to move stop losses (the point the trade will be sold if it goes the wrong way) behind the trade to a level where a pull back can be accommodated but a reversal will lock in at least some profit.

3. Discipline
Trade with a disciplined Plan. The problem with many traders is that they take shopping more seriously then trading. The average shopper would not spend $400 without serious research and examination of the product he is about to purchase, yet the average trader would make a trade that could easily cost him $400 based on little more than a “feeling” or “hunch.” Be sure that you have a plan in place before you start to trade. The plan must include stop and limit levels for the trade, as your analysis should encompass the expected downside as well as the expected upside.

4. Too much information
As with many endeavors it is important to keep your trading simple. Many traders start out with a simple strategy that is successful but find themselves chopping and changing trying to find a better system. They also allow themselves to be influenced by other opinions and too much fundamentals. It is not too different from going to a race track where everyone has a sure thing or the information available becomes so confusing you can no longer see the wood from the trees. Trading the stock market is often similar in this regard. A good exercise is to teach a child or teenager a simple trading strategy or set of rules to follow and allow them to trade a demo account. Many traders who have done this have been surprised that their children can actually trade well, consistently and often with spectacular results. The lesson is that they don’t stray from the rules and are not influenced by the media or fundamentals. Many traders pay no attention to fundamentals at all and trade successfully. The rule here is to keep it simple…don’t allow yourself to become confused with too much information and if you’re not sure or not in the right emotional frame of mind, don’t trade.

5. Do not marry your trades
The reason trading with a plan is so important is because most objective analysis is done before the trade is executed. Once a trader is in a position they tend to analyze the market differently in the “hopes” that the market will move in a favorable direction rather than objectively looking at the changing factors that may have turned against your original analysis. This is especially true of losses. Traders with a losing position tend to marry their position, which causes them to disregard the fact that all signs point towards continued losses. Don’t take more trades in the hope that the market will turn in your favour; it will only accelerate your losses.

6. Do not bet the farm
Do not over trade. One of the most common mistakes that traders make is leveraging their account too high by trading much larger sizes than their account should prudently trade. Leverage is a double-edged sword. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1-10 leverage or never use more than 5% of your account at any given time. Trading currencies is not easy. (if it was, everyone would be a millionaire!)
TEAMFOREX
James de Wet
http://www.teamforex.com/