This is a Guest Post by Jakob of Trade Profits. Jakob has signals and also does reviews on many trading education programs. You can also follow Jakob on twitter here. Please give Jakob a warm welcome and have a visit to his blog.
A couple of days ago, Casey had a post about the EUR/USD and how he managed to get back into the game after he took a hit on the rally, which for many traders, probably came as a bit of a surprise. So I took my time to post a comment and share my thoughts on how to not get caught in the psychology of trading. So let´s dig a bit deeper.
When I am in front of the screen I go into a trading mode, and here I have some “rules of thumbs” and “fixed rules”; or simply put – Soft and hard rules.
I look for all different kind of trades, and I don’t delimit myself from trading long term setups, even though my preferred style is short term trading. So a rule of thumb is that I should be looking for trades in the direction of the longer term trend. However, when I trade on a very short term timeframe, this is not equally important, and I don’t mind going against the trend, as I am looking for quick profits with no intention to keep the position open overnight. So the rule is there but it does not mean it can’t be bent or broken.
Now over time you learn to find your weak spots, and I would say that for the majority of traders out there, I think that the psychology of trading is probably one of the key aspects, which often limits the profitability. The lack of confidence and ability to pull the trigger, over trading, over leverage; this is probably one of the largest reasons why new traders lose money in the market.
One of the key points in my comment on Casey´s post was that a loss often tends to affect the rational approach which a trade has (or should have), resulting in another trade because there is a sense of urgency to make back what you just lost. Hence you will go in on a trade without a clear cut reason other than complete gut feeling, which more often than not will result in another loss. Now the ball is rolling down hill and too much leverage tends to be the next brilliant idea a trader will get after a losing streak. Needless to say that this can blow your entire account within the end of a day, and there is no trade worth taking this kind of risk.
So here comes the brilliant idea. After a loss, simply take a break for a couple of minutes. Go grab a cup of coffee, as you need to get the eyes of the screen. If you keep staring at the screen, you will get this sense of urgency, being afraid of losing out on momentum or whatever the case might be. Come back after a couple of minutes and do what you always do; wait for the right setup and risk no more than you would on any given trade. If it sounds simple, that´s because it is. Funny enough, it is often the simplest modifications of your trading style that will do the most.
Do yourself a favor and try this for a week and take a look at your trading log. Let me know what you think and share your thoughts below.
And thanks again to Casey for giving me this chance to share some thoughts here with the Winners
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