[Guest contribution provided by Forex Traders]

It was Warren Buffett that once stated, “To invest successfully over a life time does not require a stratospheric IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”  Mr. Buffett has distinguished himself as one of the greatest “value” investors of all time, but his wisdom applies if you are a long-term, “buy-and-hold” investor or a trader looking for short-term gains when opportunities present themselves.

To be successful in any of today’s trading markets, experts will tell you that knowledge, experience and emotional control are the most important factors that matter, and the latter may be the most important of all.  Traders will practice endless hours perfecting their various trading plans, reducing them to simple steps to be followed while in the heat of battle.  Having a fine-tuned plan that has become ingrained as routine habit is the only tried-and-true way for blocking the mind from unnecessary intervention, especially when the need to close a position is at the top of the agenda.  Is this psychology of trading the same in all market venues?

Over the past decade, the popularity of currency trading has swept the investment community and wooed many a stock trader over to its special style of investing.  As many have found, however, the forex market can be especially cruel in handing out its own form of justice for the ill prepared, inexperienced, and impatient throngs that have rushed to this new medium.  Failure rates are reported to be 70% and higher, thereby suggesting that some subtle differences are at play in this genre that unwary stock traders have somehow missed in the transition.

Both markets support day-trading strategies, as well as position traders.  Technical analysis skills are easily transferred from both worlds, providing the necessary guidance for selecting optimum entry and exit points, free from emotional involvement.  From a psychological perspective, both markets demand that you have a detailed plan with logical steps that cordon off your mind from messing with your “intellectual framework”, but “fear” still raises its ugly head in each genre, but in differing manners.

With stocks, you must worry about the management competency of a company, if its financial records have been manipulated, or if inside information has been leaked.  Potential bankruptcy is also an issue, and what goes down may never come back up.  In the forex world, currencies cannot go bankrupt, and even central banks have difficulty trying to influence this market from the inside.  However, the massive size of the forex market, some $4 trillion daily, and with 80% of the volume related to speculation, every little bit of information can cause massive gyrations in an instant as global opinions are formed and a new equilibrium is established.

Volatility in both markets provides the opportunity for trading, and from a scientific standpoint, stocks are technically two to three times more volatile than currencies.  Currencies, however, tend to change directions more rapidly than stocks, another form of volatility, and it is sensitivity to this other market characteristic that generally requires a defter touch and quicker ability to shift without emotions getting in the way.  It is for this very reason that forex brokers provide free “demo” accounts to practice with virtual cash and real time quotes to build confidence and consistency and to learn the nuances of this extremely fast-paced market vehicle.

Warren Buffett also pointed out, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”