All posts by dreamspinner

Emotional Control for Success When Trading Currencies

Forex Foreign Exchange Rate
Stranger in a Strange Land, photo by A Syed, Midland, MI, United States

Guest contribution provided by Forex Traders

For many investors, learning the intricacies of investing is a continuing effort that focuses on expanding personal knowledge of the principles involved and on gaining experience at the craft. Unfortunately, many of these individuals tend to be unaware or just plain forget that the most important ingredient for success, the third “leg of the stool”, is emotional control.

Understanding the psychology of trading and acting upon its precepts are often easier said than done. Not only must one react properly to the “socially-driven” movements of the market, but one also must be aware of his personal tendencies and how to prevent his mind from undermining his well-thought out trading strategies.

Studies in the field of trading psychology have confirmed time after time that our subconscious mind, programmed from birth by our personal external experiences, can often become our worst enemy when trading in a stressful environment, especially when real money is on the line and the fear of loss is present. These conditions exist in all investing markets, but the intensity is heightened when trading currencies in the forex world. Time frames are compressed. Market reversals can be swift, and successful traders must be technically nimble and decisive in asserting their trading plans.

If truth be known, behavioral dynamics actually are the contributing factor that make our markets tradable in the first place. When major currencies were allowed to float back in the seventies after years of regimented central bank control, finance officials reacted with amazement to the level of volatility in the forex markets. Each currency pair developed its own personality, fluctuating daily well beyond previous standards that had been maintained for decades following World War II. The interpretation of fundamental and technical factors can vary by individual, and these varying opinions are what lead to wavelike market patterns before a consensus equilibrium is reached.

For the individual trader, psychological factors manifest primarily in an inability “to pull the trigger” before opening or closing a forex position. This “hesitancy” can result from several causes, but the most probable reasons fall into two categories. First, a lack of confidence when applying trading principles to react to various patterns and trade set-ups can stop a trader in his tracks if he lacks experience in how he trades and in the methods that he has been taught. More practice trading on free demo accounts is the recipe, as most experienced and successful traders swear by their practice regimens.

The second reason can be termed “performance anxiety”. Fear of loss or accountability can wreak havoc on a trader’s mind. Your subconscious mind is a storehouse of many uncomfortable experiences, accompanied by coping responses that will prevent a recurrence of the previous trauma. Opening a position can generally be a more positive situation, invoking hope for future gain and displaying assertiveness when confronted by a particular market situation. Closing that position can be quite the opposite set of events. Should I or shouldn’t I? When do I pull the plug? Why now and not later? Suddenly, the threat of poor performance results in hesitancy and procrastination, a recipe for failure in the world of forex trading.

So what is a trader to do? Trading simulation systems are the only way to gain the necessary confidence and consistency with your individual training plans, but the “cure” is more about extensive practice routines to “habitualize” your step-by-step trading plan. Creative visualizations also help to define exit “triggers”, but a trusted and disciplined routine is the only known method for preventing unwanted mental intervention in the course of trading positions. And keep in mind that, even if practice accounts and theoretic trading are great for learning, they have many limitations and do not necessarily reflect real market conditions.

Twitter Updates for 2009-08-14

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  • RT @mktbot From 12 Aug $ETC:ASX Entertainment Media & Telecoms Corp.Ltd is $NBS:ASX Nexbis Limited http://is.gd/2gB5m #
  • RT @mktbot As of 14 Aug $GLI:ASX GoldLink IncomePlus Limited is now $BIV:ASX Blue Capital Limited http://is.gd/2gAeb #
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Sell & Buy 5265 BHP @ 8.60

I haven’t heard if this deal went through at the market close but I assume it did. I basically sell and buy back at the same price thereby chrystalising some losses on BHP for the end of financial year.

The options trades have been profitable so the entire position wasn’t too bad until this week. Fund managers sold whatever they could to set themselves up for next year.

I probably should not have bought BHP back but I’m enjoying the options writing. And I think it’s a profitable strategy.

R.I.P. Hartleys (non-WA)

Well Hartleys is no more (unless you live in WA). Bummer really, as they were my full service broker and that’s how I did my options trading. I can move either with my broker to a new firm or go fully on-line and use Commsec.

Full service brokers are good for after-market trades and occassional heads up calls. I value being able to buy stock at 4:30 in the afternoon, but I’m not keen on their commissions. So the deal must be worth it. Heads-up calls are normally marketing guff designed to drum up business. I don’t like them too much but I have made some money thanks to them.

I’ll set up an account at the new brokerage but will trade options via Commsec (that’s assuming I like Commsec’s options trading interface). I’ll let you know when I do that. Meanwhile I have a huge stack of forms to fill in for the new broker 🙁

Incomplete BHP trades

I haven’t noted a few trading attempts that didn’t come off recently. Mainly because I was too busy to write something that didn’t happen. With hindsight I think that was slack — trades that don’t come off are still an attempt to trade.

As BHP fell to $9.07 (1 April) I put a buy order to close my BHP April 9.73 calls. I bid $0.02 but they found support at $0.03 (remember I’m buying so it didn’t reach my offer).

My broker called me Monday (7 April) to regret not getting out at $0.03 (April calls have been firming since). I was a little frustrated, my strategy allowed me to pay $0.03. If I’d closed out I could have written a new call for $0.20-$0.30 premium. I wasn’t too fussed as I’m still in profit.

Today BHP April 9.73 calls closed at $0.05, so I think they’ll expire worthless. Sure I missed an opportunity to trade and gain about $0.25 before commissions. However thou shalt not overtrade has been tatooed under my eyelids.

Use all your resources

I just realised I had a copy of Options as a Strategic Investment (2nd Edition) on my bookshelf. Doh! I first read it years ago when Australian options markets were not as liquid for small investors.

I have some light bedtime reading coming up. That link is for a Google search in case you’ve never heard of the book. I have an old edition and I’ll probably buy the fourth edition. The basics of option trading haven’t changed.

I’ll let you know if I change my trading strategy as a result of re-reading this essential tome. But isn’t it interesting that I forgot I had it handy?

Sell 5 BHP Apr 9.73 Calls @ 0.20

I can’t add! In the last article on option trading, I said my net premiums on BHP were $0.495. The numbers given add up to $0.595! Actually now that I’ve checked my trading statements the after commission premiums are $0.4593.

I pulled out my written trading strategy ;). It told me to write 5 BHP April 9.73 calls for $0.20. The cummulative after-commission premium is now 0.6374 and I am in profit at above $9.35

If BHP falls back down to below 9.00 I’m in the red again.