Trading is difficult. The purpose of this article is not to make trading seem less difficult, but rather to emphasize that many novice traders tend to become their own worst enemy and make trading more difficult than it should be. To illustrate how this happens, try to recall the last time you were very angry, you were angry about something. Then think about what makes you angry. Then think about what you did and how you felt the first time you got angry. For many people, when they become angry, they are out of control in some way, i.e., they are unable to use their highest level of mind to "fix" what upset them, which often prevents us from achieving our goals. For traders, this question can be very tricky. Let's say you traded just ahead of the non-farm payrolls report, expecting a better-than-expected report, thinking you'll see a quick rise in the price of EUR/USD, allowing you to make a nice short-term profit. The arrival of non-farm payrolls, as you hoped - the actual data exceeded predictions. But for some reason, the price dropped! Think back to all the analysis you've done, all the reasons why EUR/USD should go up - the more you think about it, the further the price will go down. Emotions start to take over as you see your losing positions intensify. We often feel the same way if we've just been in a shocking accident, or gotten into a fight with someone else. It's a "fight or flight" instinct, and we have it for a reason. In the field of psychology, the "fight or flight" instinct is often considered a key part of the human psyche, protecting us during stressful situations. The theory is that when a person is stressed, his brain runs calculations so quickly (so fast that he doesn't even notice) that he decides how to deal with the stress. In some cases, we run away when the brain perceives the situation as too stressful to control. In some cases, when our minds sense that we can make an impact with our actions - we fight. This is why when we have an argument with other people, say or do things we regret, and in some cases, it's really out of our control. It’s the fight-or-flight instinct, part of each of us’s constant search for protection in times of stress. In trading, we can feel quite a lot of pressure. When positions start to go against us, we start to feel the pressure. The red arrows on the graph are accompanied by fears of failure that race through our brains in nanoseconds. As losses piled up, our stress grew, making the idea of taking action all the more daunting. This is exactly why our "fight or flight" instincts work against us in trading, as we allow ourselves to make decisions under extreme stress that often does us no favors. The decisions we make in these situations are often referred to as "knee-jerk reactions" or "instant decisions," depending on the outcome. Bad trades are often reactions, and good trades are often decisions. Professional traders are usually not willing to take the risk that a reckless decision could damage their account, or to put it another way - they want to make sure that a knee-jerk reaction doesn't ruin their entire career. They often do a lot of practice, and many trades try to temper this emotional response to the stress of having an open trade. Here are some ways to help traders do just that. What is the result. Bad trades are often reactions, and good trades are often decisions. Professional traders are usually not willing to take the risk that a reckless decision could damage their account, or to put it another way - they want to make sure that a knee-jerk reaction doesn't ruin their entire career. They often do a lot of practice, and many trades try to temper this emotional response to the stress of having an open trade. Here are some ways to help traders do just that. What is the result. Bad trades are often reactions, and good trades are often decisions. Professional traders are usually not willing to take the risk that a reckless decision could damage their account, or to put it another way - they want to make sure that a knee-jerk reaction doesn't ruin their entire career. They often do a lot of practice, and many trades try to temper this emotional response to the stress of having an open trade. Here are some ways to help traders do just that.
plan for success
One of the things professional traders do to ensure they are disciplined during these trying times is to plan their strategies. "Failing to plan is planning to fail," the adage really holds true in financial markets. As a trader, there is more than one way to make money. There are many strategies and methods that can help traders achieve their goals. But what works for that person is usually a definite, systematic approach, not based on "hunch." Planning out how you would like to react to each trade and each situation that occurs within those trades can go a long way in helping a novice trader manage the emotions that come with speculation. We work with many novice traders and notice that one characteristic of those successful novice traders is the utilization of a trading plan. The difference between a novice trader who uses a trading plan and one who doesn't is astounding, so shocking that we wanted to write some material so that any trader interested in developing a trading plan can has everything they need. I wrote an article outlining many areas of a trading plan that a trader may wish to focus on. Developing a trading plan is the first step in eliminating trading emotions, but unfortunately, a trading plan will not completely eliminate the effects of these emotions. Below are some of the ways traders typically try to mitigate this damage.
see how others cope with stress
We set out to study what separates those traders who are successful in the Forex market from those who are not, and the research was astounding. Looking at the most mistakes made by outside traders, we found that, shockingly, retail traders were right more than they were wrong, that is, they were often on the right side. But what is even more shocking is that in many cases, traders lost twice as much as they would have gained if they were right. The unsustainability of such a plan is obvious. If we lose $2 every time we get it wrong and only make $1 every time we get it right, then we have to make sure we are right twice as often as we are wrong. This does not include spreads, slippage or any other costs that may arise. If we use this financial management method, we often need to be correct 3 times for every 1 mistake, achieving a 75% success rate. Most professionals don't expect to be able to pick the right trade more than 3 times out of 4. Remember, every losing trade cancels out two winning trades. So if a trader happens to be in the above situation, he will be surprised - well, now he has suffered a loss. Needless to say, this is a difficult (or impossible) situation for many traders to get out of. The most common mistake forex traders make is: Traders are right more than 50% of the time, but they lose more money on losing trades than they make on winning trades. Traders should use stops and limits to achieve a risk reward ratio of 1:1 or higher.
Set a loss limit
This can be especially important for scalpers and day traders, but loss limits have been used for years to prevent a bad trading day from getting worse. We often feel negative after a losing trade. This negativity tends to build up after multiple losing trades, and this thought strengthened my view that it was time for me to finally win a trade. I can't even count the number of novice traders who have come to me and sadly lost their positions on one currency pair in one trading day chasing price. Oftentimes, these people increase the size of their trades after making a few losing trades and quickly gaining nothing. While the trade may work in your favor, the reality is that you are making quick, short-term decisions about future price action. Our education team takes money management very seriously, and in working with many novice traders, we realize the need to limit losses. In our educational courses we offer a complete module on money management with a complete set of introductions and rules for novice traders. One of the key elements of our money management courses is the 5% rule, which means that we never risk more than 5% on any one trade. This rule is there to ensure that one bad trading day does not end our trading career, or cause irreparable damage to our trading career.
reduce leverage
One of the easiest ways to reduce the emotional impact of trading is to reduce the size of your trades. Don't believe me? Remember how you felt the last time you were paper trading? It probably didn't have much emotional impact at all because there's no financial risk involved in the trade. Increasing the size of a trade or increasing the speed of a trade often increases the stress level as traders make each trade a large impact on their trading account. let me explain. Let's say a trader sets up a $10,000 account. Our traders start with a $10,000 EURUSD trade. Traders see mild fluctuations in the account as trades move at $1 per pip. Using $320 in margin, our trader sees his free margin of $9680 fluctuating at 10 cents per pip. Now, let's say this trader trades $300,000 on the same currency pair. Right now, our traders have to come up with $9,600 in margin - which leaves them with only $400 in usable margin right now. The trade is now fluctuating at $30 per pip. After the trade moves 14 pips against our trader, the available margin is depleted and the trade is automatically closed on a margin call. Traders are forced to take losses, and they don't even get a chance to see the price recover, pulling the trade into profitable territory. In this case, novice traders are simply putting themselves in a position where the chances of success are stacked against them. Reducing leverage can greatly reduce the risk of such events occurring in the future.
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