Why Psychology plays the larger part in Forex Trading

“Master your emotions and you’ll master the market”

Hello traders, after receiving a lot of positive feedback from my Trading View educational posts I thought today I would break down a subject on trading psychology with the 14 stages of investor emotions.

Learning how market cycles operate can be extremely beneficial to your trading, understanding the true influence of fear and greed.

But… Controlling your emotions within the market is your main ‘personal’ objective, becoming an emotionless trader. It’s what we’re all told from day one right?

90% of trading is purely psychology. It is the main reason why so many traders fail as they let their trading become overruled by their emotions, thus making irrational decisions.

Many traders will never overcome their inherent emotional biases, therefore you should seek to understand the range of emotions we may experience as investors and how it affects our interactions within the market.

1. Optimism: A positive outlook encourages us about the future, leading us to buy assets.
2. Excitement: Having seen some of our initial ideas work, we begin considering what our market success could allow us to accomplish.
3. Thrill: At this point we investors cannot believe our success and begin to comment on how smart we are.
4. Euphoria: This marks the point of maximum financial risk. Having seen every decision result in quick, easy profits, we begin to ignore risk and expect every trade to become profitable.
5. Anxiety: For the first time the market moves against us. Having never stared at unrealised losses, we tell ourselves we are long-term investors and that all our ideas will eventually work.
6. Denial: When markets have not rebounded, yet we do not know how to respond, we begin denying that we made poor choices. Our “long-term” view now shortens to a near-term hope of an improvement.
7. Fear: The market realities become confusing. We believe our positions in the market will never move in our favour.
8. Desperation: Not knowing how to act, we grasp at any idea that will allow us to get back to break even.
9. Panic: Having exhausted all ideas, we are at a loss for what to do next.
10. Capitulation: Deciding our assets will never increase again, we close all of our positions to avoid any future losses.
11. Despondency: After exiting the markets we do not want to trade ever again. This often marks the moment of greatest financial opportunity.
12. Depression: Not knowing how we could be so foolish, we are left trying to understand our actions.
13. Hope: Eventually we return to the realisation that markets move in cycles, and we begin looking for our next opportunity.
14. Relief: Having bought an asset that turned profitable, we renew our faith that there is a future in investing. “

Introduction to Forex Trading

The Forex trading market allows you to buy and sell the currency of any country against another. The most popular currencies amongst Forex traders are the US dollar (USD), the Euro (EUR), the Great British Pound (GBP) and the Japanese Yen (JPY). The USD is the most traded instrument, while the Euro is the 2nd. Thus the EUR/USD (Euro vs. the USD) is the most traded pair on the planet.

Do you think the Euro is going to rise vs. the USD, then you would buy it vs. the USD. Think its going to fall in value – then you would sell it vs. the USD. This is the basic mechanic of trading currencies.

Advantages and Basic Features of the Forex Market:

  • Trade Anywhere in the World: All trading is done online. Thus you can trade from any laptop as long as you have an internet connection. There is no centralized trading exchange and all trades are carried out electronically and likely commission free.
  • Higher Liquidity: The market is highly liquid (over $4 Trillion a day) which ensures that an investor can buy and sell at virtually any point of time with lower trading costs than stocks.
  • Profit in Rising or Falling Markets: Unlike stocks which you generally have to buy, you can profit in rising or falling markets.
  • Easy to Begin: You can start with as little as $300 since favorable leverage is offered.
  • Strong Volatility: Because of the high liquidity and constant need for global currency trading, the market offers several high probability opportunities a day. In the next chapter, I will discuss how the Forex market is traded, and what are the basic terms to understand

7 Things We Want You to Know About Tomorrow’s Fed Meeting

The market is pricing in a 100% chance of a quarter point interest rate hike by the Federal Reserve tomorrow, which would be the third round of tightening for the central bank this year. Normally rate hikes are positive for the currency but this month their guidance could send the dollar spiraling lower. The Federal Reserve has been the most aggressive central bank this year and many investors are wondering if they’ll give consumers a break before taking rates towards 3% in 2019. Based on the futures markets, which is discounting 75% chance of another 25bp hike in December, investors don’t expect the central bank to slow down. The stock market is at a record high, the labor market is strong and so far, the impact of trade tensions has been limited. However, we are beginning to see signs of weakness. Since the central bank last met, retail sales, inflation, housing and manufacturing activity slowed. So it could behoove the Fed to take a break before barreling ahead in 2019 especially with 10 year yields hovering near 1 year highs.

With that in mind, here are 7 things we want you to know about the September Fed meeting:

 

1. The Fed WILL raise interest rates by 25bp

2. Schedule of Events
a. 2PM Rate Hike / FOMC Statement / Economic Projections / Dot Plot
b. 2:30PM Press Conference by Jay Powell

 

3. This is the FIRST time that 2021 forecasts will be included

4. For your reference – in June, the Dot Plot showed hike in Dec, 3 hikes in 2019 and 1 hike in 2020

5. For your reference – in June, Fed upgraded their GDP, inflation and unemployment forecasts

6. This will be the FIRST time for Vice Chair Clarida’s estimates

7. Key Question – Will the Fed suggest that rate hikes need to slow down?

Since rate hike is a done deal and we don’t expected any major changes to the Fed’s forecasts. If a change were to be made, it would most likely be in an upgrade. The median forecast should stay unchanged, signaling 3 more hikes in 2019. The main question will be the pace of tightening beyond September. If Fed Chair Powell suggests that its time to slow down, the dollar could descend quickly from its highs as it would cast doubt about the rate hike in December. However if he is unambiguously hawkish the dollar will soar against all of the major currencies.

In the event of a dovish hike, the best currencies to trade will be USD/JPY and EUR/USD. For USD/JPY 113 would become a double top as the pair heads back below 112. The euro is attractive because ECB President Draghi thinks inflation is on the rise. In the event of a hawkish hike, the best currencies to trade should be AUD/USD, USD/CAD and GBP/USD. The RBA has no plans to raise interest rates this year, sterling is still vulnerable to Brexit risks and its becoming increasingly clear that Canada won’t not be able to strike a trade deal with the U.S. before the September 30th deadline. The only risk for the USD/CAD trade is that President Trump plans to hold a press conference at 5pm on Wednesday. He’ll be talking about the “news of the day,” which could mean either the Canada-Mexico trade deal, Kavanaugh nomination, Rosenstein’s fate or all of the above.

Lastly, here’s a look at how the US economy changed since the last FOMC meeting.

Reasons Why This is a Big Week in Foreign Exchange Market

This is a very busy week for the foreign exchange market and while we’re off to a slow start, trading ranges will widen and volatility will increase as the week progresses.

Meanwhile the U.S. dollar ended the day higher against some currencies and lower versus others but during the NY session investors spent most of their time buying U.S. dollars. The greenback hit low of 1.1815 versus the Euro shortly after equities opened but ended up settling the day near 1.1750. A similar reversal can be seen in sterling while USD/JPY and USD/CHF bounced off their lows to end the day at their highs. These moves had nothing to do with U.S. data because both the Chicago and Dallas Fed manufacturing reports fell short of expectations. However the prospect of a Federal Reserve rate hike this week could be helping the dollar.

With that in mind, there’s a lot more going on this week than the FOMC meeting. Here are 5 big events that we will be watching-

5 Reasons Why This is a Big Week in FX

1. FOMC meeting
2. Q3 End
3. Sept 30th NAFTA Deadline
4. RBNZ Meeting
5. UN Meetings & Central Bank Speak

 

The Federal Reserve is widely expected to raise interest rates but it could be a dovish or hawkish hike. The outcome could have a lasting impact on all of the major currencies. At the same time however, since U.S. stocks hit record highs this quarter, portfolio rebalancing will be negative for the dollar. We may have already seen some of those transactions happen earlier this month but we cannot preclude the possibility of additional adjustments this week. The Reserve Bank also has a monetary policy announcement and as usual the RBNZ’s outlook could have a significant impact on NZD. Canada-U.S. trade talks will be in focus as the next major NAFTA deadline looms. The U.S. wanted a deal closed by September 30th to abide by the fast track law that requires the agreement to be publicly available for 60 days before it is signed. September 30th is important because Mexico’s president steps down on December 1st and President Trump wants the deal signed with the outgoing and not incoming President.

Last but certainly not least, there’s a ton of headline risk this week. The UN meeting is under way and there will be a significant focus on trade. Fed Chair Powell, ECB President Draghi, BoE Governor Carney and BoC Governor Poloz are also scheduled to speak and as we saw today, the market is very sensitive to central bank comments.

Draghi sent EUR/USD soaring above 1.18 when he said there’s a relatively vigorous pickup in underlying inflation.Although the pair receded from its highs on the back of U.S. dollar strength, the euro should outperform other major currencies on the back of the ECB’s brighter inflation outlook and stronger data. Despite ongoing trade tensions, German business confidence improved in the month of September, reinforcing the increase in investor sentiment reported earlier this month. German CPI is due for release later this week and given Draghi’s comments, the risk is to the upside for this report.

Sterling on the other hand declined for legitimate reasons. Not only did the CBI’s industrial trends survey turn negative in September but Brexit negotiations are getting harder. There was talk that a deal could still be reached by November but there was no material progress. Instead both UK Brexit Secretary Raab and Prime Minister May said they are going to hold their nerve today, which suggests that they are not going to bend easily to the EU’s demands. The Australian and New Zealand dollars ended the day lower after China rejected the U.S. invitation to trade talks.

The bottom line is that right now, there’s been zero positive developments on U.S.-Canada and U.S.-China trade relations and no improvements in EU-UK Brexit negotiations so uncertainty reigns.

Thinking of forex trading? Tips to get you started

Forex trading is gaining traction in Kenya as more Kenyans are getting interested in making money through it.

1. Educate yourself

You should take forex trading as a course, just like any other financial course. This gives you the skills that you need to navigate the choppy waters of forex trading. Even people who have been trading for years often take the course in order to acquire specific skills that they have not picked up in their years of trading, and they find that it makes a huge difference when they resume. In addition, when training there is a software provided by an international brokerage firm known as XM that provides a platform known as MT4 where you are able to wire your money through local banks and the money reflects in US dollars, pounds and other major currencies.

2. Start small

You need a minimum of Sh1,000 to trade, but a comfortable minimum to trade with while learning the ropes is Sh10,000. That will allow you to possibly make profit depending on how the market fluctuates. You can make even Sh3,000 per day with that. Forex trading has a learning curve, and with a low amount, the mistakes that you make will not be too costly, allowing you to learn from them instead of getting knocked down by them. Give yourself time to get a grasp of how the market works.

3. Be in the right frame of mind

This is trading psychology. You have to be careful, so that anxiety and greed does not make you lose money. Trade with the minimum given so that you do not lose money. Many factors affect how much money you will gain, so you have to manage to expect anything. Greed may make you ignore or overlook those factors. Outline what position you are at. If you are anxious, hoping to get a lot of money and then you end up not getting it, you may trigger yourself into making further losses through more mistakes, and you might not bear those losses. Check your emotional undertones. If you are not in the mood to trade, keep off the platform until you are sober.

4. Know when to trade

Some days are good for trading, while some may not be appropriate at all. The markets are usually dormant on weekends, for example, and over holidays. You need to be able to predict such changing tides.

5. Do not make it your main source of income

You can earn a living from forex trading alone, but it takes a while to get there. The best way to get into it is slowly, while doing other things on the side, like being a student or working, in another industry. While starting, take a short course that takes approximately three months. You can work, trade and learn all at the same time.

6. Be able to read trends

Read and understand global news so that you can manage to read and understand the market. Strategies on trading keep changing depending on how the market is, so you must have current affairs at your fingertips. Trade when the market is right. Do not do it haphazardly, knowing when to enter and exit the market is crucial

7. Increase your investment with time

In order to make really good money in forex, you also have to invest in it. It works just like any other market, where the more you invest, the higher the risk but also, the higher the returns. Do not use very higher volumes in order to try to make more money faster. For example, do not try to make Sh20,000 from Sh10,000 in a day. It is better to gain Sh 2,000 per day than lose it all to greed.

8. Commit to it

The biggest mistake people make is that they borrow money to trade and they are supposed to pay it back, say by the end of the month. Some of these people wait until the last week to trade, only to realise that they do not have enough time to make money, and even make losses. If you do not follow the due process, that is exactly what will happen, and your creditors will be on your case.

9. Have patience and persistence

The market runs for 24 hours on weekdays, but sometimes when you follow the news you will realise that the market will be good at 3 am. Can you wake up at 3 am, get into the market and execute the trade? Are you the kind of person who will be told that only Monday will be good for trading, or that you have to wait over the holidays and trade in January when the biggest market movers like banks are active again and be comfortable with waiting? That is the kind of person who is likely to succeed in forex trading.

What is Online Forex Trading

What is Forex Trading?

Here you’ll find forex explained in simple terms. If you’re new to forex trading, we’ll take you through the basics of forex pricing and placing your first forex trades.

‘Forex’ is short for foreign exchange, also known as FX or the currency market. It is the world’s largest form of exchange, trading around $4 trillion every day, and it is open to major institutions and individual investors alike.

Forex trading explained

The aim of forex trading is simple. Just like any other form of speculation, you want to buy a currency at one price and sell it at higher price (or sell a currency at one price and buy it at a lower price) in order to make a profit.

Some confusion can arise as the price of one currency is always, of course, determined in another currency. For instance, the price of one British pound could be measured as, say, two US dollars, if the exchange rate between GBP and USD is 2 exactly.

In forex trading terms this value for the British pound would be represented as a price of 2.0000 for the forex pair GBP/USD. Currencies are grouped into pairs to show the exchange rate between the two currencies; in other words, the price of the first currency in the second currency.

Some commonly traded forex pairs (known as ‘major’ pairs) are EUR/USD, USD/JPY and EUR/GBP, but it is also possible to trade many minor currencies (also known as ‘exotics’) such as the Mexican peso (MXN), the Polish zloty (PLN) or the Norwegian krone (NOK). As these currencies are not so frequently traded the market is less liquid and so the trading spread may be wider.

Forex trading spread

Like any other trading price, the spread for a forex pair consists of a bid price at which you can sell (the lower end of the spread) and an offer price at which you can buy (the higher end of the spread). It is important to note, however, for each forex pair, which way round you are trading.

When buying, the spread always reflects the price for buying the first currency of the forex pair with the second. So an offer price of 1.3000 for EUR/USD means that it will cost you $1.30 to buy €1. You would buy if you think that the price of the euro against the dollar is going to rise, that is, if you think you will later be able to sell your €1 for more than $1.30.

When selling, the spread gives you the price for selling the first currency for the second. So a bid price of 1.3000 for EUR/USD means that you can sell €1 for $1.30. You would sell if you think that the price of the euro is going to fall against the dollar, so you can buy back your €1 for less than the $1.30 you originally paid for it.

Calculating your profit

Take another example. Suppose the spread for EUR/GBP is 0.8414-0.8415. If you think the price of the euro is going to rise against the pound you would buy euros at the offer price of 0.8415 per euro. Say in this case you buy €10,000 at a cost to you of £8415.

The spread for EUR/GBP rises to 0.8532-0.8533 and you decide to sell your euros back into pounds at the bid price of 0.8532. The €10,000 you previously bought is now therefore sold for £8532. Your profit on this transaction is £8532 minus the original cost of buying the euros (£8415) which is £117. Note that your profit is always determined in the second currency of the forex pair.

Alternatively, suppose in the first instance you think the price of the euro is going to fall, and you decide to sell €10,000 at the original bid price of 0.8414, for £8414.

In this case you are right and the spread for EUR/GBP falls to 0.8312-0.8313. You decide to buy back your €10,000 at the offer price of 0.8313, a cost of £8313. The cost of buying back the euros is £111 less than you originally sold the euros for, so this is your profit on the transaction. Again your profit is determined in the second currency of the forex pair.

Spread betting or CFD trading

XM provides two different vehicles for trading forex: spread betting and CFDs. Both of these products allow you to speculate on the movements of currency markets without making a physical trade, but they operate in slightly different ways.

With spread betting you stake a certain amount (in your account currency) per pip movement in the price of the forex pair. So for instance you might buy (or sell) £10 per pip on USD/JPY, to make £10 for every pip the US dollar rises (or falls) against the Japanese yen. Forex traders have been using spread betting to capitalise on short-term movements for many years now. Find out more about spread betting.

With CFDs you buy or sell contracts representing a given size of trade. So you might decide to buy 1 contract of GBP/USD, which (with InterTrader) represents a trade of £10,000. Your profit or loss is calculated in the second currency, in this case US dollars, and then converted (if necessary) into your account currency. Alternatively you can open account using the link below

https://clicks.pipaffiliates.com/c?c=56401&l=https://clicks.pipaffiliates.com/c?c=56401&l=en&p=0&p=0best forex broker

Either way you don’t have to provide the full currency value to open your position. Instead you put down a margin deposit, which is a fraction of the full value. And you don’t actually buy or sell any currency: you are opening a speculative position on the change in value of the forex pair. Your profit or loss is realised when you close your position by selling or buying.