Often or not we find ourselves in those quicksand situations where we know that our decision to open a trade was clearly wrong but we feel paralyzed to close it on time. Soon enough, we end up with no other option to close the losing trade with huge loss that wipes out weeks of small profits.
- Success as a trader requires developing a profitable trading plan and sticking to it over time.
- Ignoring their own trading rules is one of the most destructive habits a trader can have.
- It is vital that a trader view the success or failure of each individual trade according to whether they followed their trading rules—not whether the trade resulted in a profit or loss.
As a Forex trader this is perhaps the most common reason for people to lose their capital if not getting a margin calls. In order to understand this common phenomenon, we first have to take a look at our social conditioning and personal psychology.
Since childhood our family education and institutional learning has taught us one thing, to get things right, if possible all the time. Children are stigmatized for making decisions that are socially considered as wrong. We are conditioned to be right about situations that yield positive results. Closing a trade with a loss, regardless how small, defines our decision to open the trade as wrong. Accepting that you were wrong is not something people are prepared to accept.
Moreover, novice traders often start to take the outcome of their strategy too personally. Instead of thinking that the strategy is wrong they associate a losing trade being reflected on them, personally, that they are wrong! Perhaps another reason is that most retail traders invest money that they cannot actually afford to lose. Thus, they get over involved with their trading.
On the other hand professional traders comprehend the uncertainty associated with trading Forex or any other trading instruments. They recognize the fact that a trader is only as good as the strategy they are executing. If a strategy is failing then it does not reflect on their judgment, personally. They cut their losses short and pause trading after a series of losing trades. Then they focus their energy to improve their strategy instead.
The fact remains that successful traders learn to trade in statistics on a series of trades, where novice traders take each and every trade’s outcome as a matter of life and death. If you want to become successful in Forex, learn to apply the Casino model. Just like a Casino know that if players keep playing for hundred times they will lose due to the “house advantage” over a long term, a trader should try to think in hundreds of trades not just the one. In Forex, your strategy should provide that “house advantage” and you should think in long to medium term results like a Casino does.
How You Should Not Exit a Losing Trade
Before showing you how you should exit a trade why not go on to how you should NOT exit a trade. What we are going to discuss is a mistake that is made by many new traders, and while it might work for a while, it will eventually end in disaster!
So what is it?
Well, just don’t exit the trade if it’s a loss!
As strange as it might sound, some traders simply choose not to exit a losing trade. They believe that if they stay in the trade long enough, it will eventually turn around, and let them exit at a profit.
Using such a method assumes that the market is just in a temporary dip, and is soon to rebound. And while that assumption could hold true in strong bullish trends, it will eventually prove to be wrong. And once the market indeed turns around, those who applied this strategy will lose a large portion of their capital, if not all of it, that they’ve made from sticking to losing trades.
So how alluring the thought of holding on to losing trades even might sound, it’s bound to end in disaster, sooner or later.
However, even when it does work, it’s an unwise and useless method!
If you have a strategy that you have tried and back tested with good positive result then you should focus on executing the strategy flawlessly instead of munching over the outcome of a single trade.
Turn the table around and become the Casino instead of the player in Forex. If you succeed in doing that then you will perceive how easy it will be to earn real dollars over a longer timeframe without worrying about the outcome of a single trade.
Frequently Asked Questions
What does it mean to be successful at trading?
Being a great trader means being consistent over the long-run. This means being diligent, learning from your mistakes, and keeping emotions in check. Stay within your risk tolerance and if you don’t know something, learn about it.
How can people be unsuccessful trading?
Trading too often, being swayed by fear and greed, herding behavior, and trend chasing can all lead to failure.
Is luck important?
Luck, whether good or bad, is always a factor – but over time, the effects of luck will wash out and patterns of success or failure will emerge.
The Bottom Line
Still, the fact remains that no trading plan will work if it’s not followed. So in the short term, you should define success and failure according to how disciplined you are. Always stick to the plan, and don’t deceive yourself into thinking you made a successful trade when you only got lucky.