Trading Psychology

Trading Psychology

Posted on

The trading psychology plays an important role on the markets. This is our emotions who dictate our decisions and we are therefore a good or a bad trader. To be a good trader, it’s not enough to feel the market, you must also know how to let your profit run and cut your losses. It sounds easy to say but emotional control is often more difficult than you think. All the stakeholders are subject to their emotions, including two which seem to be at the bottom of each decision: fear and greed. Each individual behavior is unique but a human cannot escape his emotions. It can however learn to control them.

Fear of losing

Everyone is in fact afraid of losing, even if everyone reacts differently to each situation. That’s why for most people it’s hard time to cut their positions when they are losing even if their trading strategy was predetermined in advance. It is often said “it will get back” or “we will see what happen” and it is often the best way to lose a lot more! For me, the main reason of the ruin of some individuals who have failed to be disciplined enough to follow their trading plan. It is better sometimes to cut off your hand rather than your arm…

Learn to cut its losses is difficult but we must not forget that your capital is your working tool. Without capital, you can do nothing. This is why we must preserve it. It is therefore advisable to risk a preset percentage of its capital on each transaction. This percentage may be for example of 1%. This seems little, but when you are making several trades, your overall risk can grow very quickly. Do not risk all your capital on one trade allows you can to cut your losses more easily. There is a big difference between losing 50% of its capital and lose 1%. You can easily understand that taking the loss on a 50% risk of our capital is not an easy decision. In doing so, we come to say I’ll see what happens’ or the famous “it will come back’. If you want to be a competent trader, banish such words of your language!

The solution is to risk a small percentage of your portfolio on each trade and then, when your risk is determined, to establish your trading strategy. This must go with a stop loss. We cannot emphasize enough that a stop loss is needed for each operation! The stop loss helps you avoid you to be stuck on your screen all day to monitor your trade, and therefore you remove some of the stress-related to the trading. But the stop-loss can also determine a point at which you estimate that your scenario will not happen.

The level of stop loss must be determined before the operation and shall in no case be modified during the trade, unless if the trade goes in your side and in this case, we can function with a moving stop. Move your stop on a losing trade is being confronted with your emotions and thus to the fear of losing. To ensure that your loss will not be materialized because of the close of your trade, the fear will make you change your stop loss such kind that it will never be reached by the price and you will say ‘this will come back one day’. Then the fear of losing lead you and you’re doomed to run this way. Make no mistake, the price do not always come back.

Greed leads to your loss

Fear is not the only factor that guides your decisions, there is also greed. Everyone thinks it is possible to very quickly gain a lot of money especially on the Forex due to the high leverage available. What people forget is that the high leverage also means high risk. Certainly, on a fluke, this can work, your trade goes in the right direction, you are rich but not so sure. Let me explain.

First, people who are using a too high leverage do not often use stop loss because their account is too small to put a stop properly. Trade with 1 000 000 $ on the EUR/USD ($ 100 per pip) and an account at $ 1000 for example and your margin capacity is only of 10 pips. (And I do not take into consideration the spread.) Hard to set a stop loss! If the trade goes in the wrong side, most often all your capital is loss. The risk is enormous.

But that’s not all, because if the trade goes on the right way your emotions will often play with you. Let’s stay with our former example. If the EUR/USD goes 3 pips in your side, you close your trade and then you win $ 300. Great you say, +30% in one trade! But if we reflect a little, your risk was losing $ 1,000 to win $ 300 ($ 500 going to be nice). From a viewpoint of mathematical expectation, does the game worth the candle. ?

It’s hard to say but I say it for you: NO!

However, that’s what we see regularly on the Forex. Trade with a too high risk will always make you act as a stupid person. I’m not afraid of the word, if your view on the Forex is to act like that, then go to the casino! Trading requires discipline (follow a structured trading plan, money management…).

Let your profits run and cut your losses

I can reassure you anyway, it is possible to earn money on Forex and if you’re good, it can be done fairly quickly. The important thing is that as I said before know how to run your profits and cut your losses. Cut your losses, I’ve already talked to (stop loss, money management.). To run your profits, it must be taken as, do not cut your position as far as your target is not reached or until your stop loss was executed (if you trade trends and then you trade with moving stops).

Too many traders take their profits too quickly once he sees the operation is in profit. Follow your trading plan that was established before and most of all do not hesitate to strengthen your position if the trade goes in the right direction. For example, when you’re moving your stop, you can open a new position. So if the trend continues, you can win a lot. If you trade with targets, take a ratio risk / return that is interesting.

All this will make your winning positions largely compensate your losing positions. It is very possible to get rich on Forex by doing more losing trades than winning ones.

Add a comment

Leave a Reply