Loss, this could mean so many things, but in Forex this could mean the end. Unfortunately enough a loss is very much likely to associate itself to a psychological effect that would trigger other things too. Primarily anger, doubt, depression and other emotional factors that would be triggered from losses, this not always we can control. So how do you handle Forex trading losses? It is simple actually, you should just stop trading. Honestly that is the best solution to do if you do not want to be taken over.
The only exception to this is the trader that is disciplined enough to detach himself / herself from the monetary aspects of trading. It is not easy but yes you have to get into a mental state of detachment from the money in order to focus on the trades. You cannot be worried about the draw-down of your trading account and be 100% concentrated on the setup and market movements.
When most retail traders go through periods of many losses, especially larger losses, they would get into revenge trading, they would enter trades even based on nothing, not even setups that have high probability. I have seen traders that not only open revenge trades but leave them more open and expose themselves much more then usual. All this because they think that the ultimate trade is now going to hit and get the account back up to profits! Well sorry, that will not happen. The exact opposite will actually happen. The trades will get worse and your account will end up to zero in a very short time. Possibly leaving the retail trader without trading capital or with just a nominal amount as trading capital after being wiped out.
Learn to accept loss as part of your trading, just make sure that your profits outweigh your losses.
The idea that the market is random, when properly considered, is ridiculous. In fact, randomness in any context is wholly an illusion. It is just a word we ascribe to situations we feel that we cannot predict. In science, the apex of randomness is the “Brownian Motion” experiment, where particles are observed moving randomly as they are buffeted by other unseen particles. However, if we knew the speed, mass and position of all the particles within the experiment, we would be able to predict the exact position and timing of every movement! It is exactly the same with financial markets. Price movements are caused by the value and timing of buy and sell transactions, and if we knew the intentions of every market participant we would be able to predict every tick of the market! So markets are not random, just effectively random to us on smaller time frames as we cannot possibly determine all the information required to accurately predict market movements.
The truth about technical analysis on smaller time frames is that it can provide a statistical edge, albeit a very small one. For example, certain technical formations, over large samples, might show a 53% probability that the price will reach 20 pips in one direction before the other. So the market can be beaten, even by technical analysis. It can be beaten even more easily by traders who realize that the same technical formations that show a 53% probability of 20 pips might also show a far more profitable 35% probability of 80 pips. All speculative markets can be beaten, in the long run, by strategies which cut losers short and allow winning trades to run in an unlimited fashion. This is because speculative financial markets consistently produce improbably excessive returns far more often than they would if they were efficient.
Scalping is a trading style specializing in taking profits on small price changes, generally soon after a trade has been entered and has become profitable. It requires a trader to have a strict exit strategy because one large loss could eliminate the many small gains that the trader has worked to obtain. Scalp-trading is very demanding and requires a lot of concentration, constant monitoring of the price and very quick decision making. Also, short time frames used in scalping strategies, require a good grasp of trading complemented with sound technical analysis skills. It is not a place where beginners feel very comfortable as it demands from traders a good chunk of experience.
Scalping involves substantial risks A lot of beginners have common problem when trading highly leveraged accounts – they tend to maximize profits by trading with full capital at once. Do not do that! Maximizing chances for higher profits goes hand in hand with maximizing risks! he size of positions opened must be calculated very accurately so that your entire account will not be wiped out with just one(!) very unfortunate trade.
Another factor that increases risks for scalpers is the spread traders pay when open a trade.
Each time a new trade is open, the spread cost is paid to the broker, thus opening 10 small trades instead of 1 long term trade increases the cost of trading in 10 times. If to measure risk/reward ratio of such scalping activity it may show very risky and potentially losing trading.
Example: With GBP/USD currency pair a scalper sets profit target of 10 pips and stop loss of 10 pips. So far it is 1:1 risk/reward ratio.
In the next step, when the spread is added, the picture changes. For example, the spread his broker charges for GBP/USD is 4 pips. When a scalper opens a position he is -4 pips (the spread has been charged). Now in order for him to reach the target of 10 pips profit, the price has to move +4 and +10 pips = 14 pips. On the other hand, in order to trigger his stop loss the price should move... -4 is already in place... so, only -6 pips and he will be stopped at total of -10 pips... the risk-reward ratio has changed in over 2:1, not very promising situation indeed...
To understand the full challenge of scalping as a trading style, consider this: hard work and small gains accumulated over a decent period of time could easily be wiped out with one large loss. Finding a balance between profit levels and size of acceptable losses presents the most difficult challenge to scalper’s strategy.
Best of luck in achieving your goals!
Mistake number 1: Emotional attachment to losses – this is not by accident the first mistake on the list as it is the most common mistake that new traders tend to do. You set a stop loss to a trade at 100 pips, the trade doesn’t go your way so you adjust the stop loss, when you reach the 200 pips point, you decide in your mind “how low can it go?!” or “it must go up,” and you keep adjusting the stop loss until you are destined to lose much more than you were willing to initially lose on that specific trade.
Mistake number 2: Taking small (or really small) profits. In a way, the execution of this mistake is very similar to mistake number one except of course it goes in the complete opposite direction. You enter into a trade, see that you are “in the green” and decide to take the profits before you reach the take profit that you had initially planned.
Mistake number 3: Trying to recover losses in one big trade. After you suffer some losses you decide to open up one high leverage trade to recover all the losses that you suffered on your trades in the past.
Here are three simple rules to prevent these two mistakes:
First of all detach yourself emotionally from your trade; this is not a long term relationship. Remember – this is a business and like any business if it’s not profitable, then you should sell/close the business.
Second, decide on a strategy and stick with it. Choose a risk/reward ratio on your trades, if the reward is higher than the risk and if you have 60% winning ratio on your trades, over the long run (after a month, quarter and even a year) you’ll be in profit.
Third, use low leverage and don’t risk more than 2% of your equity on a single trade. In order to succeed in rule number 2 you have to follow this rule.
The rules are very simple and for some reason very hard to follow, with a few years of experience I find it also myself sometimes hard to keep disciplined. But as long as you keep discipline, believe in yourself and stick to your strategy you will have a much better chance of becoming a successful trader.
Interesting interview where Jordan (The Wolf of Wall Street) goes over the 4 keys to success as he discovered throughout his life. If the interviewer could have spoken less and quit interrupting his points, this would have been a greater interview. This guy has a lot to say, although he is not the mot ideal role model, he's been through a lot and has learned some valuable lessons we could all benefit from. In case you have been living under a rock, Leonardo DiCaprio stars in a movie made based on this guy’s life.
Most traders start out absorbing information from anywhere they can. This information will come in the form of stock picks, books, seminars, trading coaches, gurus, and blog posts like this one. Your personal beliefs, background and personality traits will then take that information and digest it and mould the base for your trading.
Next you will take all this new information into the markets. This can be exciting and a bit daunting at the same time. If you are lucky you will put on a few trades and things will go according to plan. The money will just flow. If you are unlucky, you will quickly realize why 90%+ of traders fail within the first few years of taking up the charge.
No matter how you start out you inevitably will face a loss that will hit you in the gut. This loss will resemble the first time a girl broke your heart, or the disbelief you had when you heard at school that the tooth fairy didn’t exist after your parents have been encouraging you to hide your teeth under your pillow for years.
You will feel a sense of utter disparity as your trading world unravels much quicker than the time you have spent to build it up.
This is where a lot of traders, in an attempt to improve dump all their current knowledge of trading onto their charts and smother them with indicator upon indicator, believing this will somehow make their analysis more accurate, however the exact opposite happens,they become confused by heir own charts, tings have become cloudy and their charts lack clarity which then leads to more losses.
Indicators can be useful however it is important not to rely on them too much let alone overload your charts with them, I would suggest a maximum of four indicators on your charts however some would suggest even less than that, some may even suggest not using any indicators at all, however I do like to stress that you must find the style of trading that suits you, your personality and your lifestyle.
What is an equity curve: A graphical representation of the change in value of a trading account over a time period. An equity curve with a consistently positive slope would generally indicate that the trading strategies of the account are profitable, while a negative slope would indicate that the account is in the red.
People spend a lot of time analyzing their individual winners and losing trades looking for some sort of insight that will help them "crack the code". Maybe if I choose a different moving average or if I cut my losses earlier. These all are helpful things when looking at one or two trades, but how would this impact all of your trades? Have you honestly maintained the same system long enough to even analyze how minor tweaks could help?
Reviewing individual trades is critical, but even more important is the review of your equity curve. This allows you to take a bird’s eye view of your trading performance. The crazy thing is if you plot your equity curve you will see some of the same patterns that you see in price charts. When you review your equity curve you can see clear as day psychologically how you are processing the information presented to you by the market. It is better if you start your review of your account first by looking at the equity curve before you go into each individual trade. This will let you know if it’s really your system or if it’s you sabotaging yourself.
A quick video demonstrating how to use The Fibonacci retracement tool
Money Management Golden Rules
Rule 1: Risk no more that 2% of account balance;
Rule 2: Use natural support / resistance to set the stop-loss; and
Rule 3: Use the range between current price and the proposed stop-loss to calculate lot size.
The golden rule of money management is "Never risk more than 2% of account funds on any one trade", which refers to the amount that may be lost, and not the amount that may be traded. You could trade 5%, 10%, even 20% of your account funds, but your stop-loss must not allow more than 2% of your account funds to be at risk. Using this 2% risk factor and combining with the stop-loss range (number of pips), you can calculate the lot size that can be traded without exceeding your 2% risk factor if the stop-loss is triggered. The most important element in this calculation is the stop-loss.
SETTING THE STOP-LOSS: Any indicator that identifies support and resistance can be used. You could use lines drawn at support or resistance, or you could use a Moving Average, or Parabolic SAR, for example, provided your choice provides a clear reference point on the price chart. I prefer to use either a Moving Average or Parabolic SAR, as both of these automatically move with the price action and provide regular points at which to set my Trailing Stops. I will use Parabolic SAR in this example.
CALCULATE STOP-LOSS RANGE: For long position, subtract Parabolic SAR from the current price to determine number pips between Parabolic SAR and the current price. This is the stop-loss range.
If you have trouble calculating this or just want to make it easier for your self check out this Profit/Loss calculator