This article looks at the different types of traders that exist on the foreign exchange rates trading market.
While it is essential to gain an understanding of the technical skills required for foreign exchange rates trading; one must also be aware of the trading psychology associated with the forex market. Many new and experienced traders have experienced detrimental losses as a result of emotional trading. However, trading psychology is more complex than controlling one’s emotions. One must also have an insight into your personality as the fit between your temperament and strategy. This is important as it can greatly affect your trading.
The impulsive foreign exchange rates trader
An impulsive foreign exchange rates trader is one who trades on emotions and gut instinct. This type of trader ‘feels’ the price movements and trades accordingly. For example, if prices in a EUR/USD rise sharply the impulsive trader will feel that he must place a short trade. The currency pair will rally higher convincing the trader that he has traded in the correct manner. He will then sell more currency feeling that the pair was overbought, which contributes to the short position. In this instance, prices will stall but do not retrace. This will lead to an impulsive trader tripling his position, except the pair may spike and the trader facing a loss as the pairs sell off without him.
In the illustration above, the impulsive trader was on the correct trading course towards a profit. However, he chose a top impulsive and not logically which contributed to his detrimental result.
The logical foreign exchange rates trader
The logical foreign exchange rates trader, or the analyser, will use both technical and fundamental forms of analysis to determine his trading behaviours. Using the example above, he will agree that the EUR/USD pair is overvalued but instead of picking a random turn he will wait for clear signals before initiating a trade. This signal will be indicated using some form of forex chart such as a Bollinger Band or a movement in the relative strength index. This type of trader will also use swing highs of the price movement as a logical stop to quantify the risk of the trade. He will also size his position to ensure he does not lose more than 2% of his trading capital should the trade turn bad.
Based on the illustration above, one can see that the logical trader uses a more methodical approach to reduce the level of risk in trading. Although the reckless behaviour of the impulsive trader may have incurred more profit had it been successful, the logical trader ensured no detrimental loss would be experienced.
Final words on the matter
Although the foreign exchange rates market does present with more ranging conditions than trending, a trend can last for a very long period of time; therefore, picking the correct strategy with which to trade is important. Although new traders find impulsive trader very exciting, the experienced traders will agree that logic will always ensure a prolonged trading career.
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