This is a guest post from Tino @tradersreality the article originally appeared on tradersreality.com and is reposted here with permission.
Make no mistake, the truth is that every new and old trader has experienced the battle of when to close a trade that was bleeding their capital.
In my opinion, the difficulty in letting go of a losing trade in trading has taken me a few years and many losses to realize and put into practice.
When I started to detach from my perceived outcomes I “expected” from my trade entries, I then started to embrace the novelty of “uncertainty” that surrounds the markets.
Do not take for granted the importance of trading morale. This is your fuel that you need to return from the days of draw-down that can and do occur in this industry.
M.E is an acronym I use to remind myself every day, the one tool I must use and react to any emotional imbalances that can occur/build up when I trade.
This reminds me that I must make my decisions based on my objective mind, not my emotional mind.
Now I am not saying that once I tell myself M.E, then everything is fine, it’s a deterrent that I use to create awareness of my emotions when I am in a trade that may not be going my way. It is also applicable to profitable trades. Many times I have questioned myself when I have profit in a trade: ” should I hold this” or ” this is going to the moon”.
Even though my rules tell me when to take a profit, I’m human. They say ride your winners, but this is a double-edged sword, your winners can ride to losses if you are not careful.
Creating something that allows you to become aware of your faults in trading is the greatest step that any trader can harness. When applied correctly, you will save yourself so much money and emotional distress.
I won’t be naive and say:
“Yeah, just do this and you will be fine”
It takes practice, more so, it takes courage to do the opposite of what your brain is telling you to do.
I will talk you through how “The Battle” occurs, whenever you are presented with a trade, losing or winning.
So I have entered into what I deemed as a high probabilistic entry point.
Trade is live….
corrects a little,
then we start to see some movement…
wait for it……
BOOM…BREAKOUT…IN THE MONEY.
Lets see how this plays out…
OK…..Starting to pause…It’s OK, I have at least 20 pips profit right now.
Oh, OK, it’s pulled back to our entry, I will see what happens,
Hmm, stop loss is close, I will move it slightly, the big breakout is telling me that this move wants to go higher….
Ahhh man, what’s happened, it’s still going down, what shall I do?, lets take a breath Tino…It’s correcting, you can sit through this, your entry must be correct if it broke out. Sit tight.
……right…I am in the red, down 35 pips, I have to wait till this breaks even or I at least recuperate my loss.
Oh man, my entry was wrong, I don’t care, this is going to return….
[email protected]*K %&$(&^$*^%$*&^%(*&^%(*&%*^%$*&^%(*&^%(*&^(&%*&^$%$^^**(_&)*& ( you can imagine what’s happened)
So the scenario above can really touch base on the battle that goes on with every trader if they fail to respond to the signals that can save them time and money. Let’s take a couple of sentences and study what is happening.
“then we start to see some movement…wait for it……BOOM…BREAKOUT…IN THE MONEY”
This is a time that our minds can enter into the moment of euphoria. A VERY damaging mind set to have when you trade. WHY? Because anyone who experiences a moment of euphoria will do everything in their power to hold on to that. The feeling of being correct will give them confidence and false belief in their self that they are an amazing “trader” and can predict the markets movements.
Key point.: At any point, remain calm…If you make an entry and it’s favorable for you, great. Always maintain M.E. It can go wrong at any time.
“OK…..Starting to pause…It’s OK, I have at least 20 pips profit right now”
This is probably a scenario that I have experienced many times in my trading, however I am making sure that I manage my positions as best as I can to avoid costly mistakes.
When you reiterate to yourself that you “have 20 pips” or whatever amount of profit. Just remember, you were not aware that you would make 20 pips profit. This is a market of uncertainty. You have managed to exploit the market for 20 pips. Your job as a trader is to capitalize on this, not see how much more you can make.
At this point I would be saying to myself, “take what you can”, there is always another trade.
NOTE: My strategy relies on scalping profits. I find that I have more control of my entries and exits as I am not committed to allowing a certain move to play out or unfold. I do my very best to avoid the market exposure. Like I have said, uncertainty is an obvious vortex that takes no prisoners. FAST IN, FAST OUT, that’s my motto.
The next scenario…
“Hmm, my stop loss is close, I will move it slightly, the big breakout is telling me that this move wants to go higher….
I will say that I have done this more times than I can remember. I made the mistake of thinking just because there was a breakout or price looked like it was going up further, I would move my stop loss just to give the trade more room to breathe. Once you enter into this state of mind, the battle is happening in your head. It is at it’s peak, setting you up for a great loss or taking away any objective control. By simply moving your stop loss:
1) You have not considered your risk before entry.
2) You are guessing.
3) You are not confident at all with your conviction of the stop loss point from the start of the trade.
Just because the price appears to show strength at the entry does not mean it will continue and be sustained until you get the desired profit. The market can and does whatever it likes. Whenever it likes. Do not take this for granted. Be cautious, protect what you have.
You can imagine the rest of the scenario. I would have blown up my account on one position. All because of how soon I saw a profit and was only interested in preserving my ego.
My mindset was blurred with the euphoric state of being correct on my entry. I went “TRADE BLIND”.
A couple of thoughts…
Trading can be enjoyable, but it can also be soul destroying. You have to have grit in this game. You have to be prepared to take responsibility for your actions. The scenario above, I am sure many can relate to. But if there is one thing you take from this it’s the following:
1) Have confidence in your strategy. Set a stop loss that allows you to be comfortable with it being hit and you can accept that the trade was wrong.
2) Do not attach yourself to the way your trade is behaving. Always say to yourself that anything can happen. Learn to protect your capital. Cash Is King. Serve him well.
3) If you sense that your trade will not play out, that is completely fine. Do not think that the one trade you take is going to be the final one and the market will forever close. There is always tomorrow.
4) Do not fight with the market, more so, you are to focus exclusively on what is happening with your trade, it’s hard to manage a trade and manage the battle of your mind. If your stop looks like it’s going to get hit, fine, if your position is making pips and is moving more in your favor, LOCK EM in. Protect those pips.
I hope that this post touches base with the battle that goes through our minds when we are trading. With perseverance, you can achieve consistency in Forex…Only if you learn to control your mind.
Trade Well My Friends.