Trading Psychology Forex Trader

Every market participant has his or her own set of reasons and rationales for placing an order today. Although many reasons to sell exist — to pay taxes, generate cash for college tuition, or meet a pension obligation, among many others — there’s only one reason to buy: You think the security is going up in price.

For that reason alone, traders often pay more attention to what is happening to buy orders than to sell orders. To get a sense of who is projecting a profit, traders look at the number of buy orders coming in, how large they are, and at what price.

Because there are so many good reasons to sell but only one good reason to buy, the market can take a long time to recognize bearish (pessimistic) sentiment indicators. Even if you see that prices should start to go down in the near future, you have to consider that the market today can be very different from what you see coming up. And as a day trader, you only have today.

The psychological aspect of trading is extremely important, and the reason for that is fairly simple: A trader is often darting in and out of trade on short notice, and is forced to make quick decisions. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so that they stick with previously established trading plans and know when to book profits and losses. Emotions simply can't get in the way.

Traders need to understand what fear is - simply a natural reaction to what they perceive as a threat (in this case perhaps to their profit or money-making potential). Quantifying the fear might help. Or that they may be able to better deal with fear by pondering what they are afraid of, and why they are afraid of it.

The best traders are able to figure out the psychology of the market almost by instinct. They can’t necessarily explain what they do — which makes it hard for those trying to learn from them.

But they can tell you this much: If you can rationally determine why the person on the other side of the trade is trading, you can be in a better position to make money and avoid the big mistakes brought on by hope, fear, and greed.