Hello traders! This week’s newsletter was inspired by a very common new trader problem; that is, trading with fear.
By now I’m sure you’ve heard that the two main emotions that enter into trading are fear and greed. In my last Professional Forex Traders class in beautiful San Diego, a student mentioned to me that one of his common trading issues was taking profits too soon. In my humble opinion, this is a lesser known symptom of trading with fear, the fear of losing.
Experienced traders accept that losses are a cost of trading. If you struggle with a fear of losing, you may be trading larger position size than your account/heart/stomach would allow. In every forex class that I teach, I recommend starting with a risk of .5% of your account. With such a small percentage, your initial fear should be minimized. As your experience and confidence builds over time, I would expect this risk percentage will increase to 1%, 1.5%, even up to 2%. Don’t be too aggressive and go about risking 10%, 20% or more of your account on a trade! That trading adventure will be very short!
There Are 5 Possible Trade Outcomes
There are five possible outcomes to any trade: A large loss, small loss, flat or break-even, small win, and large win. When you eliminate the large losses by using stops properly, we expect the small losses and small wins to cancel each other out, leaving you only large wins. Sounds easy enough, right?
Here is the problem: many traders get into the unfortunate habit of closing their winning trades too soon, before the move is done. Why would they do this? The reasons are varied but two stand out to me.
Why Traders Exit Trades Too Early
The first is that they have watched a trade go profitable, say $200. Then, as the currency pair pulls back to where the trade is only up $50, the trader will often be afraid of missing out on any profit at all so they will quickly exit the trade. Guess what probably happens next? The trade very often goes to their profit target without them along for the ride. That fear of losing caused them to miss out on profits. Has that happened to anyone else? Because I know it has happened to me before!
Another potential “reason” this trader may be taking small profits out of fear is they have seen a small gain turn into a small loss when the price hit their stop loss. There are two things to note about this issue. If price hits your stop and then reverses toward your profit target, your stop might be in a technically silly location. What constitutes a silly location, you ask? When going long, we recommend that you enter your trade at a quality demand zone, and short in a quality supply zone. Your stops should be a few pips below or above the zone you used for entry. It would be the rare trader indeed who can consistently make money with a 3 or 4 pip stop loss! The second thing to note is the trend you are trading with. If you are a counter-trend trader, you must be quicker to move your stop to break even than a trend follower. Counter trend trading is harder and requires more effort. I prefer easier and less effort myself!
Remember the five potential outcomes? If you consistently exit your winning trades too early out of fear of losing profit, guess what happens to your big wins? They don’t exist, that’s what! You might not be losing money as a trader with this strategy, but your probably aren’t making good money either. New traders often quit because they just aren’t making enough to continue to trade. So we need to fix this problem.
The Solution to Exiting Trades Too Early
There are two things that I recommend in class to help with this issue. The first is to trade in the direction of the trend. You can use a trendline, moving averages, or just the pure price action to determine the trend. Trading with the trend definitely helps the big wins happen! The second recommendation is to stop staring at your screen when you are in a trade! If your plan was to be in this trade for a couple of days, yet you are watching the one minute chart, you are doing it wrong! If watching every couple of pips go against you makes you fearful of losing profits, step away from the screen for a couple of hours at a time so you won’t be tempted to exit a winner too early. (You should still check your charts occasionally to see if you need to trail your stop, of course!)
I hope these simple suggestions will help with your “trading with fear” problem!
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
AUD/USD extends its upside above 0.6600, eyes on RBA rate decision
The AUD/USD pair extends its upside around 0.6610 during the Asian session on Monday. The downbeat US employment data for April has exerted some selling pressure on the US Dollar across the board. Investors will closely monitor the Reserve Bank of Australia interest rate decision on Tuesday.
EUR/USD holds positive ground above 1.0750 ahead of Eurozone PMI, PPI data
The EUR/USD trades in positive territory for the fourth consecutive day near 1.0765 on Monday during the early Asian trading hours. The softer US Dollar provides some support to the major pair.
Gold holds below $2,300, Fedspeak eyed
Gold price loses its recovery momentum around $2,295 on Monday during the early Asian session. Investors will keep an eye on Fedspeaks this week, along with the first reading of the US Michigan Consumer Sentiment Index for May on Friday.
Bitcoin Cash could become a Cardano partnerchain as 66% of 11.3K voters say “Aye”
Bitcoin Cash is the current mania in the Cardano ecosystem following a proposal by the network’s executive inviting the public to vote on X, about a possible integration.
Week ahead: BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.