Is that necessary to keep the stops so religiously even before the forex beginner actually starts live trading ? As a matter of fact, the importance of stops is always underlined, emphasized and highlighted by a thick yellow strip. Is that the crucial key to success? Do you hear this distant echo: “Take care of your losses, profits will take care of themselves”.
Never mind? Because again and again the forex beginners blow the stops, change them while trading and keep a losing position with the desperate hope that eventually it turns around.
This destructive pattern often continues despite all the warnings and often there is a deeper reason for this. It is often a fundamentally false idea about the market environment and trading. Such misconceptions lead to wrong psychological framework which, in turn, results in damaging trading strategies. It is often necessary to work out fundamental, even philosophical idea the forex trading and the market environment in which the trader operates.
Let us analyze some of those misconceptions.
Right action results in profit.
A beginner often considers the forex market as a black box somehow comprising firm links between inputs and outputs. This models implies that every input results in a single possible output. The simplest case of such model is “good news – up, bad news – down”. However, it’s not entirely correct since forex reacts to news in a variety of ways.
Similarly, an inexperienced forex trader using the setup he expects to work also expects every trade to be a winner. “Everything was exactly like in that book, but the goddamn trade failed”. Remember that for is a stochastic model. Everything may be exactly like in the book and exactly like the last week and yet the trade fails.
If the actual stochastic system generates certain percentage of pluses over time, it’s just statistics, as it is always the case. However the statistics does not predict a particular outcome of a particular trade.
No matter how good is the strategy, any trade can fail.
It is very important that the trader differentiates the losses. The first kind is a loss caused by a mistake such as a failure to follow the rules of the trading system or emotional decision without any reason at all. Such losses must be just taken as a lesson.
The second kind is the case where step of the forex strategy was in place and yet the trade failed. Such losses are a part of trading game. Out ultimate a tribute to the probability laws that rule the markets.
Of course, you can and eventually will identify am element of your trading strategy that frequently leads to failure. In that case you have to tweak your system in order to minimize the losses.
However, during the trade a stop must be taken as soon as the indication of failure appears otherwise it is a disaster waiting to happen. Failure to recognize the forex market as an probabilistic environment results in another misconception:
Losses can be eliminated.
In a strange way, this incorrect idea leads to more losses. A trader tweaks his system endlessly trying to get rid of losses entirely.
The permanent tuning and re-tuning results in system evolving into something totally different, losing its primary scheme and logic. Finally, a trader either discards his system, which was not a bad one to begin with, or in a worst case, simply refuses to take losses.
He made his system so perfect by reducing all the chances for failures, it just must work! However, had he stayed with original idea, maybe with some minor adjustments, it would continue generating steady results.
My trade is who I am.
This is one of those so hidden subconscious ideas that the trader refuses to take the stop without a reason.
The trader sees the result as a mirror image of his personality. A trading loss makes him feel as a failure whereas winning makes him feel "right". Nobody likes to be a failure, to be wrong. That’s why, in order to avoid being wrong, we refuse to take our stop. Remember that we are swimming in an uncertain environment, you can be right and still lose on this particular trade. You can be wrong and win, too.
That is why it is so important to differentiate between your self-perception from the result of your trade. Taking a stop loss, you are stopping your loss, nothing else. The most important element of the correct approach here is a realization that by accepting the market as an uncertain environment, we already have accepted the possibility of losses.
If we haven’t see the market as a model which works in our favor every time we trade, there is no reason to feel irrational when it doesn’t.
Also read Forex Trading Psychology
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