Trading Psychology & Discipline

Where and When to STOP

In this post, i shall share some common behaviour of traders which i personally have experienced and how to eradicate these behaviours!

To kick off, there was a statistic done which shows that most of the traders are winning around 60% of their trades & losing the remaining 40%. Then how the hell are they still losing money?! And here's why,

*Ps: I've exhibited almost all the behaviours below before, it really requires a lot of mental strength not to commit it! Haha

1) Inconsistent Trading: Lets assume you have 1000 dollars inside the account. You place 100 dollars onto one trade, and next another 500 dollars onto the next trade. It's OK if your account equity is high. But if it comes to the situation above, what would happen next is that if the 500 dollars trade did not go your way, you'll require your remaining amount (400-500) to fight it back for you and that would place you under a big amount of stress. When a trader is stressed out, 99% of the trades would not go their way. Believe me, the hole in your pocket would only get deeper and deeper.

Solution: Be consistent, try to place only around 3-5% of your equity if your account has huge funding. I understand if your account has only 1000 and below, you would like to commit more risk for more return but still, BE consistent! Do not place all your eggs into one basket. When you've committed a wrong trade, do not double up on your next trade thinking that you'll make a comeback. Be rationale, be disciplined and stick to the plan. When you feel upset about your lost trades; go for a run, take a day off and come back even stronger.

2) Stop Loss: I believe almost everyone who's reading this has encountered a situation before where you believe that the trade that you are losing right now, would bounce back soon. The key word here is SOON, and next is what makes you think so? Is it because of your gut feelings, the fear of closing a losing trades? I have situation before when i was reading the charts with all the timeframe, it was telling me that my trade is wrong and i have to pull out.

I never like closing a trade on a red note and hence i often hold on to it thinking my margins should be enough to pull it through. There was a $400 trade which ballooned into a $1000 trade due to my additional funding to prevent margin call. Eventually, i still lost the trade.

Solution: It is OK to close a losing trade! What's more important is that you've learnt from it and do not commit the same mistake next time! Give yourself a stop-loss of maybe 30pips movement first, and when it is going to be activated, have a look at the chart if it's going to turn towards your favour soon or continue the rot. If it's going to reverse soon, maybe you can increase it to 40pips stop-loss, AND that shall be your last extension! However if the trend is continuing heading against your way, close it! By cutting your losses, you would still be able to continue your trades, and improve from there!

Never place a trade immediately after a loss

Every human is ingrained with a certain level of ego on the need to make everything right, no one loves to admit that they might be wrong. This behaviour is witnessed in tradings too, where once a trader has set his sight on the outlook of certain trades, it's hard for the trader not to enter it immediately. As eventually, it should head towards the direction of the outlook he analysed isn't?

It is true to a certain extent, however by entering at the wrong timing, the trader is putting himself exposed to two factors which often led to loss of equity in the account.

First, he is being exposed to lower profit, eg a trader entered a sell USD/JPY position based on analysis @ 114.50. However the market continues its bullish trend to 114.90, before descending to a level of 114.30. His profit would only be 20 pips, where if entered at the right moment, his profit could reach up to 60 pips!

And also based on the above example, the second factor is, SL might be activated before the turnabout to the direction that the trader wants, which i believe a lot of you have experienced it before!

And now allow me to refer back to the title of this post on why you should never place a trade immediately after a loss. The reason is that emotion state of the individual might be stirred and therefore could not assess correctly on the entry point, and the above scenarios would then happen.

Even for seasoned traders, they still have the tendency to succumb to this trade called "Emotional Trading", where traders feel the need to prove the market wrong immediately after a loss by entering the trade instantly because they hold close to their belief in the direction they have traded on.

To prevent this mistake of entering at the wrong timing due to loss, don't ever enter it immediately in the first place. Take a break, clear your mind and come back even stronger.

You know you are screwed when you start hoping.

Many often a time i found traders on forum using verbs such as Hope and Wish, for the trades to go in the direction they desire. And this often causes a losing trade to exit out of the supposed stop losses limit, which ultimately may be the cause of liquidating the whole account.

You can have 9 winning trades, but it only takes one trade where you are not disciplined to lose all your winnings, or even more.

Trading cannot be successful without a plan. Trading by emotions, by news events, or out of fear, is not very different than gambling. Successful market timers win because they follow a plan. Unemotional and with clear buy and sell signals.

Hope is also closely tied to ego. We do not want to admit that we have made a mistake. Our ego wants success, and wants it immediately.

Losses do not feel very successful. Our ego can cost us a great deal of money. In order to make money, we need to keep losses small, while letting our winning positions run. Neither hope nor ego has any place in market timing. Neither hope nor ego has any place in making trading decisions.

Tips on preventing situation where you need to Hope for the trade to go in your favour.

1) Set a stop loss when you place the trade

2) Enter the market at the right moment, you do not have to be always trading. Entering it at the right moment allows you to have plenty of space for the market to manoeuvre before going in the direction that you seek for.

3) Exit out of the trade the moment you start to Hope, there is always another day for a comeback.