Tag Archives: trading

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.

Buy 5 BHP March 9.49 Calls @ 0.05

That represents $0.17 x 5265 to close out the position. As these are covered calls I own 5625 BHP against which I write these calls. Since doing this BHP has gone from $9.95 to close today at $8.93 so it’s fallen $1.02 (my average buy price was below $9.95).

In the same time I’ve earned net premiums of 0.24, 0.185 and 0.17, or 0.495 all up (less commissions). So I’m facing a net loss. I don’t feel bad about this as I think BHP should bounce back nicely. There is a risk of overtrading here.

BHPEL down to 0.075

OK, it appears that I have wondered from my trading strategy and am trading on emotion. Yes it is good to take insurance — in my case I did that by buying BHPEL back at 0.105 yesterday to close out my position.

I didn’t expect BHP to hit $9.49. For the record I don’t think it will hit it before 27 Feb 03 when the calls expire. But what if it did? So I closed out.

I need to document my trading strategy and follow it for a few trades.

Buy 5 BHP Feb 9.49 Calls

I bought them back at 0.105 (0.005 profit) to close out the position. That makes it my worst option trade to date. I’m out $230 in commissions. Something is going on with BHP and I have no idea. Neither does my broker. I could hold on, if BHP hits $9.49 I get exercised and pay selling commission, or the option expires worthless. Either way I have too much to do to hover over the markets hoping.

After calling the order, I changed my mind. I’ll tough it out and see what happens. I have the ALL trade’s profits as a buffer. Luckily (?) it was too late, the trade went through and my position is closed out.

If BHP continues to rally I’ll write a 9.97 call next and should get good premium.

Write 5 BHP Feb 9.49 Calls

OK after some needling I’ll blog when I do an option trade as well. Basically all I’ve done since November 2002 is write covered calls on my BHP holding. The deals were
5 December 10.21 BHP Call options
Each contract is 1053 shares so 5 = 5265 shares
Premium received $0.30 x 5265
bought them back to close out the position at $0.06
Income on deal is $0.24 x 5265 = $1,263.60 less commissions (~$240.00)

5 January 9.97 BHP Call option
Premium received $0.20 x 5265
bought them back to close out the position at $0.015
Income on deal is $0.185 x 5265 = $974.03 less commissions

Today wrote 5 February 9.49 BHP Call options
Premium received $0.11 x 5265
Income on deal so far is $0.11 x 5265 = $579.15

I don’t expect to buy them back to close out the position because
1) the options expire 27/2/02 – only 15 days away;
2) they are worthless unless BHP breaks $9.49 in that time;
3) I’ve become more bearish on BHP so I don’t mind being exercised.

Sell 920 NCP @ 10.85

NCP opened at 10.90 (up 0.32) and slid down to 10.79 at midday. The entire portfolio is in profit. But I don’t think things have bottomed yet.

So I decided to sell half the NCP holding at a close to high price of 10.85 at 3:00pm.

I am overweight NCP and that exceeds the 3% target gain. So if NCP heads down I’m still in profit. If it keeps climbing I’ve taken some profit and it is cheap insurance.

Buy 5745 ALZ @ 1.40

ALZ is Australand. They are property developers.
At a Freestyler Network meeting in late July, I was told ALZ paid a 3c fully franked quarterly dividend (ex-div 9-Aug) and the stock was around $1.40.
Downside analysis should it become a long term hold:

  • An annualised 8.57% yield before franking credits.
  • My overall portfolio is underweight Sydney real estate (I’m bearish on it but I’ve been wrong before). So stock market exposure to the property market.