I have two signs prominently posted above my forex trading computer. They read, “Take the Profit!” and “Stop the Bleeding!” They are there as a reminder, a critical reminder, to avoid the two sure ways to kill your forex trading account.
[tweetable alt=””]Greed and emotion are account killers – deadly account killers.[/tweetable] Let’s take a look at each of them and how they threaten your trading success. I’d go as far as to say that if you can just avoid these two forex trading traps, you’re almost guaranteed to be a successful trader.
One of the first trading maxims I heard many years ago, when I started out as a commodity futures broker, was “Pigs get slaughtered”. Well, it only took me about ten or fifteen years to finally really learn the truth of that maxim and steadfastly apply it to my trading. Greed will kill you in trading – in forex trading, stock trading, commodity trading, or any other kind of trading. Here’s greed in action: You have a very nice profit…but you want more. And you’re just dead solid sure that the market is going higher (or lower). And so you hang onto your position even though your profit slowly starts to erode. Now you’re only 10 pips ahead instead of the 20 you were. But you just “know” the market is going to move back in your favor. But it doesn’t. Soon, your profit is all gone, maybe you’re even suffering a loss. Somewhere around this time you probably have the thought, “I should have gotten out at 1.3580!” That’s right – you should have.
Don’t be greedy. TAKE THE PROFIT! In currency trading, if you turn a profit – I don’t care if it’s just one dollar – every day you trade, you will eventually make all the money you want to, and more. Stop trying to make a million dollars in one trade. I cannot stress this point enough – take a profit!
THE DOWNWARD SPIRAL – THE SPINOUT
Now let’s get back to your story, and look at the other account killer – the most deadly one – the downward spiral fueled by emotion (usually anger). The flip side of “take a profit” is “minimize your losses”. You’re going to have losing trades – we all do, it’s part of the game – but if you can just keep those losses small, you’ll be fine, and your profits will more than cover them. Now, back to your story…Your once profitable trade has turned into a small loss. You’re kicking yourself for not taking the nice profit you had. You’re mad because a profit you had has now turned into a loss (HINT: You don’t actually “have” a profit until you TAKE it by closing the trade). You’re angry with yourself, angry with the market, and (understandably) just generally upset because you’re losing money. And here’s where you run off the rails and start killing your account: You’re determined to get that profit back, you absolutely refuse to take a loss. So what do you do? You stay in a losing trade as it becomes an even bigger loss, hoping against all good reason for the market to turn around. You move your stop again and again to avoid being stopped out. If you get stopped out, you immediately re-enter the trade, with a stop even further away. Or worse, you double up your position, thinking (or rather, NOT thinking, not very smartly anyway) that when the market “inevitably” moves back in your favor, you’ll make up the loss by having a position twice as large as your original one. The market continues to go against you – your equity is dropping at a dangerous rate. But all that does is make you more anxious, more frantic, more desperate…and more foolish. The downward spiral continues until you’ve either completely blown out your account or taken a loss so big that it will take you weeks of good trading to recover from it.
Sound familiar? We’ve all done it. I know I have, and more than once. The first time I built up my trading account to $1000 (having started with less than $100), I completely blew out the account in just two days – wiping out all the profits I had spent months making, and I did it by following just the disastrous path I described above. If you’re an experienced trader, that’s not that hard to believe – you may even have done it yourself (although I hope not). That’s the reason for the second sign above my trading computer – “STOP THE BLEEDING!”
Okay, so you violated the first rule and let a profitable trade turn into a losing trade. Bad move, but not a disastrous move unless you compound it by going into that deadly downward trading spiral. Just take the hit. Fine, you had a losing trade – it happens. But as long as it’s not a huge losing trade, you’ll get over it, probably as early as tomorrow. I have – once, I let a 10% profit turn into a 5% loss, but fortunately I had the good sense to just take the loss, and I turned a 20% profit the very next day (ironically enough, in the exact same pair, at almost the exact same price points), which did a wonderful job of taking away the pain of that small loss.
Maybe you don’t have to post big signs on the wall like I do. I do, because I’m self-aware enough to know that I’m a born gambler and therefore prone to falling into those two deadly trading traps. But please, for the sake of your success as a forex trader, do whatever you have to, to firmly fix those two ideas in your mind – “take the profit” and “stop the bleeding”. Because here’s a very simple secret to being a successful trader: If you can simply avoid doing the wrong things, you’ll naturally do the right things.
Wishing you success and happiness, always! And as always, these are just my thoughts and opinions. I could be wrong. But I’m not.
This article was written by: Jack Maverick a writer and active currency trader. Check out his novel, the psychological thriller “A Cross of Hearts”
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