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Psychology of Financial Markets

To understand the processes of financial markets, you need to understand a little bit of human psychology. At the exchange, all the usual feelings and desires are expressed many times stronger. Natural feelings like anger, irritation, fear and hope, in the speedy pace of trading are often crucial for the trader. The weak and the hungry, the slow and the self-confident  -  all these players will become victims of the trading game. Knowing your own weaknesses and shortcomings will help you to avoid bankruptcy, and if you can properly assess the psychology and behavior of other traders, you will be destined for success.

Greed

The dominating feeling that compels players to participate in currency trading market trading is the thirst for risk.

If you are too cautious in everyday life, then you can lose many opportunities to close profitable deals in exchange markets. So the best solution for you will be to choose another type of business, one that is more secure and less risky.

If you like taking chances, then most likely you will strive for greater trading volumes, exposing yourself to greater danger. We would recommend you go to a casino, as this will be much better (and cheaper) for you.

You should distinguish two types of motivations:

  • rational, which is natural for the professional trader, and for the young trader before his first trades;
  • irrational, a passion which every trader has, but some players seek to master their excitement, while others are too emotional and therefore doomed to failure.

Determining what motivates you during the trades is easy, if you pay attention to the following signals:

  • you are seeking the opinion of others;
  • you are talking about your opened positions;
  • you are working without any plan established before entering the market.

All this shows that the trader is driven by passion, not by reason. The best cure for the excitement is making up a financial plan of activities, that is, the plan of deals.

Hope And Expectation

Hope for a profit is another factor driving a trader. Undoubtedly, the purpose of any work is to gain and maximize profits. However, if hope dominates over the calculation, there is a risk of overestimating your capabilities in analyzing the situation, so in your imagination, you can turn a real small income into a huge unobtainable profit. Hope must be submitted to a reasonable calculation. It is hope that leads novices to ruin.

Hope is crucial in two cases:

  • at the moment of entry into the market. It is the hope of profit that compels a trader to commit a transaction in the financial market;
  • at the time of loss, when there is hope for a change for the better.

There are three steps prior to hope emergence:

  • First, with minor losses hope is often justified and inevitable (if you are acting strictly according to plan and are confident of a favourable outcome).
  • The second phase begins when losses continue to occur. At this time, it is very hard for the trader to reasonably assess the situation and his possibilities. The best solution is to close the loss-making position or leave everything as is -- depending on how much the trader can control his desires.
  • The third stage take place when the losses are critical and hope has been replaced by despair (novice players are often very weak and desperate). Most traders are very familiar with the feeling of devastation, when it seems that the whole world had turned against them. The trader who managed to survive the last stage can call himself a successful forex online trader. However, in his later career, the events of the third stage will accompany the player as fear.

Fear

Fear comes into play when a player makes losses. Some people are paralyzed by fear, they can not respond, and they go bankrupt. Others are forced to act by fear, and they make mutually exclusive deals, which makes them go bankrupt even faster.

In the critical period, the player needs to better improve the situation, rather than sit down and watch your dreams slowly disappear while quotes are changing. However, chaotic actions are no good, either. Acting reasonably and gradually is the way to work out of crisis. The player should not panic, and follow the plan made up before opening the positions.