Forex Trading Mindset - Measuring Your Risks

One of the most important attributes a successful Forex trader has is his or her trading mindset. With a correct mindset, the trader can act consistently in implementing his strategy to the Forex market. As he is guided by theory, he is able to avoid making mistakes while trading. Mistakes can prove to be costly, and thus it is important to learn how to adopt the trading mindset to avoid committing these errors.

Most trading errors are committed when the traders are affected by previous trades that have gone wrong. For example, you would be more angry when a trade went wrong if you were very certain that it would be profitable in the first place. You felt that you couldn't have gone wrong, and definitely would get it right the next time. When the next trading opportunity comes along, you badly want to prove yourself by making this go right. However, your emotions cloud your mind and you make bad decisions. This makes you more angry and the cycle continues-the more emotionally attached you are to the trades, the more you lose.

What I've stated above might seem exaggerated to you, but it is easy and common for traders to deviate from their trading strategies when they can't deal with making errors. They just can't accept the risks of the trade. We've all heard stories about traders who could have lost less if they had pulled out of a losing trade earlier. Their emotions and initial certainty in their decisions urged them to "wait it out" and they thought that it would get better, when often predictions of worse scenarios are more likely. This would not have happened if they had adopted the correct mindset and had treated the initial capital as a ticket for potential profits.

Traders should enter a trade with the mindset that their initial capital is used to purchase an outcome that is flexible. What this means is that the initial capital is spent not for a guaranteed outcome, but for one that can end up in two ways. Not all trades end up being profitable. If the trade goes well, the capital translates to monetary gains, but if the trade goes badly, the investment is exchanged for experience. Therefore, it is important to know your limits when you are deciding to enter a trade. You must measure it against each of the 2 outcomes and decide how much each is worth before putting your money on the line.

Usually, the worse outcome is when the trade goes badly. Therefore, that is the lower limit of your capital investment. However, it is weighted by the potential gains that you'll get if the forex trade turns out well. Thus, you should decide the appropriate amount that you're able, and willing to risk, and view that as an investment that you'd get back in cash or in experience in Forex. When you're able to do this, you've adopted the trading mindset and are more able to control your emotions and avoid making trading errors.

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