Mental Forex Accounting

In plain terms, mental accounting is derived from the term ‘mental accounts’ which refers to some people’s method of categorizing money in different capricious classifications and based on those classifications, they decide on the best ways to spend their money.

Mental Accounting in Forex Trading
At times, investors might be hesitant to sell an investment that once had huge profits attached to them but now have only minimal gains up for grabs, during an economic boom, people tend to get accustomed to plenty of profits and when the market correction deflates investor's net worth, they're more cautious  when selling at a smaller profit margin. They create mental compartments for the gains they once had, causing them to wait for the return of the same or more amount of profit.

Advantages and Disadvantages of Mental Forex Accounting
Needless to say, mental forex accounting has the potential to be harmful to the trader as when the trader is constantly subconsciously categorizing all the money he might be making through trading, he might be restricting himself from making use of the money in ways that he wishes to. For example, it might cause the trader to classify inherited money in the ‘windfall revenue’ mental account and would choose to spend it more liberally than the money they put under their ‘paycheck’ mental account, in this way traders tend to treat their money with discrimination while investing.

In conclusion, mental forex account is undeniably a smart method of properly managing your money as a trader and understanding what money belongs where, rather than seeing it all as something that can and should be risked on trade. However what the trader must remember is that no matter what mental account you put a certain amount of money in, there will be no impact on your wealth, because mental accounts are just that- mental.

- See more at: https://goo.gl/dEg6XB