Shared by Raju, Avid Blog Reader
It has been my experience in trading and helping new and seasoned traders, that the greatest cause of losses is the absence of self-discipline. You need self-discipline to follow your trade plan; to be patient; to take losses… and profits! And, to practice sound money management.
Fear and Greed
With the tremendous leverage trading offers, you are frequently exposed to the basic emotions of fear and greed. At certain times throughout your trading career these emotions can make you completely and absolutely irrational, oblivious to what is really happening. It can make you rely on hope; hope that the market will do what you want it to do because it “must”! Otherwise, you will lose all of your trading capital.
Danger of Success
As Traders made money, they invariably became overconfident, sloppy, and “dangerous”. You are most likely to make these same mistakes when you are making money, not losing it. After several losses, you naturally tighten your discipline and become more conservative, or lose your trading account. After several losses you are likely to lose the least amount of money on a trade.
It is following a string of profitable trades that you are most likely to lose large amounts of money. If you began trading with a 5,00,000 account and limited yourself to a maximum 3% risk, you could lose a maximum of 15000 per trade. With profits increasing your account to 8,00,000, you can now lose 24,000 per trade. Worse yet, flushed with success you are more prone to break your rules and “wait a day”, when you should have been stopped out.
Most of new trader, largest losses have occurred from my smallest positions. After making large profits, I let these small positions run into extremely large losses because I was overconfident.
Trading is a game of psychology. It is a game of balance. Emotional extremes create an imbalance. In your quest to make money, you will make mistakes of greed. In your reluctance to take a loss, you will make mistakes of fear. The tremendous emotional release you will feel when you finally close out a large losing position is amazing… You will fight the market, yet know it will to go against you, but wanting it to go in you favor – hoping for it, worrying about it, praying for it. After a few hours or a few days of that, it will feel as though the weight of the world is taken off your shoulders when you finally take the loss.
One of the early signs that you have made a serious mistake is when you change your routine and begin to tell your spouse and friends the“reasons” for the market to go your way. Or, polling the internet looking for those taking your same position, asking your Forex broker what he thinks you should do; hoping that some government action will bail you out. This is not Forex trading; it is hope. Hope is the most devastating of all emotions in trading the Forex markets because it can lull you into complacency. You know when you find yourself hoping, that you are wrong, and should immediately get out of the market, but it takes an unusual amount of self-discipline to take that very large loss.
Once you’re able to digest the common mistakes I’ve outlined above, your odds of making money are be greatly increased.