Simple Rules of Forex Trading Psychology

So you’ve heard of forex, maybe you’ve been reading about it for a while, maybe you’ve recently learned of this system, which has added trillions of dollars in wealth to the world since its inception. You likely have some concerns. Perhaps you’ve even opened a practice account online. Maybe you’ve done OK, maybe you’ve been baffled.

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There are two key components, and only two components, to being consistently successful with forex trading.

One is when to buy, and the other is when to sell.

Yea, I know. Duh.

There are several different reasons for when to buy. Some are based on purely technical indicators, which care nothing for the underlying currency. Others are purely based on the currency itself and the fundamentals that are driving the price movement. Many, most actually, combine the two.

I don’t want to discuss when to buy, there are many valid reasons for this, and I’ll write about some of the good ones later. In this article, let’s talk about when to sell.

Again, there are only two reasons to sell.

The first, and painful reason, is that you’ve hit your stop loss. You’ve gone down to the point that you previously decided would be the maximum you’d allow yourself to lose on any position, no matter the reason. Personally, my absolute maximum loss is eight percent. I usually get out before that, sometimes with even as little as four percent. And when I say four percent, I mean four percent of my own personal investment, not four percent of the leveraged amount.

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This part is easy. No brainer. Down a certain percent, and Amityville Horror. (GET OUT!)

The other part is trickier. When to get out to lock in a profit. After you’ve taken a position, and see it go up and up and up, it can be easy to imagine all the millions of dollars you can make, and wait just a few more pips before you get out. This, of course, can be deadly.

The best way I’ve found is to set two solid, unbreakable rules. Out at a loss of eight percent, and out at a gain of twenty five percent. Some go higher, 30, 40, even fifty percent. It’s up to you. But the important part is to set your limits, and stick to them no matter what.

When you choose these two limits, and as long as you are investing in the direction of the general market, you can expect to make consistent, long term profits. It’s only when you get fearful or greedy does it get dangerous.

Remember the old saying from those old time stock market guys:

“Bears make money, bulls make money, but pigs and sheep get slaughtered.”

Master your emotions, and you will master the markets.

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