Using trailing stops in a trading System
The author, Charles ‘Chuck’ LeBeau, began trading his first commodity system in 1963 and has been an active systematic trader in the stocks and futures markets for more than forty years. He is the co-author of Computer Analysis of the Futures Market (McGraw-Hill, 1991). It is considered to be a classic work in technical analysis and is published worldwide in seven languages.
* Chuck LeBeau discusses the use of exit strategies in designing a trading system. In this installment, he discusses the use of the “Channel Exit.” This method takes a popular entry strategy and applies it to exiting the market with a trailing stop
The necessary precautions have been taken to avoid catastrophic losses by using disciplined money management stops. Now, it is appropriate to concentrate on strategies that are designed to accumulate and retain profits in the market. When properly implemented, these strategies are intended to accomplish two important goals in trade management – they should allow profits to run and at the same time, they should protect open trade profits.
While their application is extremely wide, we do not believe that trailing stops are appropriate in all trading circumstances. Most of the trailing exits we will describe are specifically designed to allow profits run indefinitely. Therefore, they are best used with systems that are trend following.
To riad whole articles here
Minimizing Trading Risk through Proactive Threat and Error Management
“Mishaps are like knives that either serve us or cut us as we grasp them by the blade or the handle.”
As an ex-military helicopter pilot, I was taught to operate effectively within an environment of risk. Failure to appreciate risk within the aviation environment,whether civil or military, can potentially lead to dire consequences – injury or loss of life, damage to or loss of aircraft or other equipment, mission failure and almost irreparable damage to public image or unit morale. The risk in trading is different, but the consequences of trading failure are no less severe. Not only are you are placing your money on the line, you are doing so in an even more difficult environment, where uncertainty prevails and what worked yesterday may not work so well today. Failure to appreciate risk in the trading environment can devastate not only your financial future, but also that of your family. Trading is a serious business! The good news is that success can be achieved, if you are willing to put in the required time and effort. The focus of this article is on one of the key steps that I believe a professional trader must take, in learning to respect the dangers within the market environment and learning to proactively manage your business in
order to minimize risk and maximize opportunity.
Risk Management
How do you define risk management? Unfortunately, most traders have a fairly narrow view
of risk management, relating it simply to the use of a stop-loss in order to limit risk on any particular trade. Do not feel bad if that was your answer – it has become common practice within the trading industry for the term risk management to relate simply to the risk on an individual trade. My aviation safety background has led me to hold a slightly wider view of risk. I would prefer to define risk as anything that can impact on my trading business producing adverse effects. With this definition, risk management then becomes the processes and techniques I have put in place to manage that risk. As we discuss risk, it will help for you to adopt this wider definition. The methodology we will use for managing risk is called “Threat and Error Management” (TEM). Individual trade risk is not considered within the context of TEM. A loss on an individual trade should not be considered a threat to your business or an error, provided the trade is managed in accordance with your tested and documented trading plan. Trade losses are a normal part of trading. Anyone who has difficulty accepting losses as a normal occurrence
Failure to appreciate risk in the trading environment can devastate your financial future. Lance Beggs discusses incorporating a tool to aid in identification and management of business risk to effectively deal with anything that adversely affects a trading business. would do well to study the probabilistic nature of the markets, in particular through reading Trading in the Zone by Mark Douglas. So, while it is essential for you to develop, test and document your strategy for positioning stop losses – that is a different process. It is not the subject of this article. Rather, we will discuss a tool to aid you with identification and management of other business risk. Consider it ‘contingency management,’ if that helps. An Introduction to Threat and Error Management Crew Resource Management (CRM) training has been developed since 1981 by the civil airline industry in an attempt to reduce the number of ‘human factor’ related aviation incidents or accidents. Despite significant resistance on its introduction from aircrew who described it as ‘charm school’ or ‘psychobabble,’ it has proved to be a great success in enhancing aviation operations and safety. Over the last three decades, CRM has undergone a number of changes, leading to the current sixth generation CRM, which has the aim of providing a defense against threat and error. The concept of TEM is considered current ‘best practice’ in the field of Crew Resource Management (CRM). Threat and error management (TEM) aims to identify potential sources of threat and error within your operating environment and provide users with the knowledge, tools or procedures to effectively deal with these threats or errors. TEM aims to establish three layers of defense: 1. Avoiding the error or threat whenever possible. 2. Trapping any error or threat, which could not be avoided. 3. Reducing the consequences of any error or threat that cannot be trapped. A prerequisite for successful use of TEM is the acceptance that threat and error are a natural occurrence. I find that many novice traders have a belief that professionals do not make errors. Nothing could be further from the truth. All traders are subject to error. Regardless of how experienced a trader you are, you will experience periods of missed entry due to distraction. You will be tempted from time to time to push entries when bored as a result of inactive markets. You will suffer through periods of low motivation leading to less than ideal focus. You will make occasional basic operator errors, such as entering long when your intent was to enter short. And you will definitely trade at times when less than 100% physically
or mentally fit. In fact, the more experienced a trader is, the more likely they are to believe they
are capable of making sound trading decisions despite high levels of fatigue. That is a dangerous belief, for not only is the ‘expert’ trader more likely to make an error, they are forced to respond to it with fatigue impaired decision-making. TEM requires acceptance of the fact that you are human, you are subject to limitations in terms of physical and mental performance, and you will be exposed to both threat and error in the trading environment. It is not about apportioning blame. By all means, be critical of yourself if you intentionally violate your trading routine or processes. But if the non-compliance is due to error, accept it, learn from it and devise strategies to avoid, trap or reduce the consequences of a repeat occurrence. Figure 1 shows that both threat and error are a normal part of your trading business. Hence the need for TEM procedures and countermeasures, along with normal trading routines, processes and procedures. Let’s take a brief look at both threat and error in a little more detail and then discuss practical strategies for
implementing TEM into your trading business.
Threats
Adopting the common aviation definition, developed by the University of Texas Human Factors Research Project, threats in the trading context are defined as any event which: • Occurs outside of the influence of the trader; • Increases the complexity of the process of trading; and • Requires the trader’s attention and management to minimize risk of loss. These are external events not caused by the trader that have the power to disrupt or complicate the normal trading process. This was demonstrated in Figure 1, where the threats originate external to both the trader and the trading process. Threats are typically categorized as either environmental or organizational. I like to add a third category, being Personnel Threats. Table 1 provides an example of the types of events that could be considered threats.
All trading businesses are unique. Yours is quite likely very different from mine. So, it is essential that you take the time to consider the threats you face within your business. The list of threats in Table 1 should provide a reasonable starting point for your own business threat analysis. Use it as a basis for developing your own threat list, within the categories of Environmental Threats, Organizational Threats and Personnel threat.
Errors
Once again, let’s adopt the definition created by the University of Texas Human Factors Research Project. We will define errors as any trader action or inaction that: • Lead to a deviation from normal trading procedures, intentions or expectations; • Reduce safety margins; and • Increase the probability of loss. Referring back to Figure 1, you will note that while threats originate from outside of the trader, errors originate from within. Errors in the trading context are typically categorized as Platform Use Errors, Procedural Errors, Violations and Communication Errors. Once again, I like to add a category for Personnel Errors, to deal with the
influence of a negative mindset or attitude.
Countermeasures
Effective management of threat and error occurs through the three layers of TEM defense mentioned earlier:
1. Avoiding the error or threat whenever possible.
2. Trapping any error or threat that could not be avoided.
3. Reducing the consequences of any error or threat that cannot be trapped.
Documenting within your TEM Plan countermeasures designed to avoid, trap or reduce the risk is the way to carry out effective management. These countermeasures will usually be in the form of a procedureto be carried out either before or during your trading session, however may also refer to other measures such as training or selection of backup software or hardware. Countermeasures requiring action prior to the trading session are simple to implement through inclusion in your pre-trading routine. Countermeasures requiring action during the trading session, in response to unanticipated threat or error are a little more complex. The key to ensuring effective management of these threats and errors is early recognition. The most effective way for you to achieve this is to trade with a feeling of ‘chronic unease.’ Do not confuse chronic unease with a pessimistic outlook. I personally trade with confidence in my abilities and my strategy, but I remain vigilant at all times. Something, somewhere, at some time, will act to interfere with my trading, which leads to deviation from my planned process. Chronic unease means remaining vigilant, anticipating threats and errors, in order to recognize them early and hopefully resolve them before they cause damage to your bottom line. Once recognized, the threat or error procedure or countermeasure is implemented, Hopefully, this will resolve the issue in such a way that the threat or error proved inconsequential. In other cases, the management of the ori ginal threat or error may lead to further error, needing further countermeasure action. Or in the worst case, you may be too late or the response may be insufficient, leading to a significant loss of funds. Learn from it – it happens!
Implementing TEM
Effective implementation of TEM will ensure you minimize business risk and maximize opportunity. The process can be as simple as the creation of a spreadsheet with data as shown in Table 3. Take time to consider the threats and errors within your own business, and document appropriate countermeasures to either
(1) avoid the risk entirely,
(2) trap it if it can do damage, or
(3) minimize its impact should it
eventuate.
You should consider either incorporating your TEM document into your trading plan, or referencing it from your trading plan. Be sure to make it a work in progress and add new threats or errors to your TEM document as they are discovered. Add a step to your daily and weekly review process, to consider:
• What threats or errors occurred during this trading session,
• How were they handled,
• Was the countermeasure effective, and
• How should you address this threat or error next time it occurs?
In conducting your review, it is important to recognize successfully managed threat and error in addition to those that were poorly handled. Recognizing successful performance provides significant learning and training value as well as validating your TEM procedures. I am thoroughly convinced that a proactive implementation of TEM into your trading business will provide considerable benefits. If you do not have another methodology in use for proactive management of risk, please consider applying TEM to your trading business.
Emotion Management System
What is Emotion Management System?
Emotion management system is the subsystem of the forex trading plan which controls how closely you follow your trading system and your money management system. The control is executed through the weakening of the destructive emotions (those that force you to deviate from your systems) and strengthening of the beneficial emotions (those that force you stick to your systems). That is, emotions which make you deviate from your trading system or your money management system are weakened and those emotions that encourage the strict adherence to these two systems are instead strengthened.
The premise of the emotional management system is that each type of emotion uses a portion of a limited reservoir of mental energy that should be carefully protected against wasteful uses. An emotion is, in essence, a form of mental leverage that turns ideas into actions. Because this storage of mental powers tends to be limited it should be used carefully - without becoming too attached to or "invested in" - your trades (in the same manner that the leverage is best used sparingly), so that no single trade can hurt you emotionally - because the outcome of any single trade is almost always random. It is best to use this energy for the implementation of your trading system and money management system (which are simply computerized expressions of your analytical abilities or another professional forex trader) than for the implementation of your subconscious fears (which are often inappropriate defensive mechanisms derived from your past experiences). Below is the description of destructive and beneficial emotions along with the techniques which can be used to manage them.
Quote: "Management of one's emotional state is critical. The truly exceptional traders can stand up to anything. Instead of getting emotional when things don't go their way, they remain calm and act in accordance with their approach." Charles Faulkner, in Jack D. Schwager's book "New Market Wizards".
Destructive Emotions
One of the strongest destructive emotions is fear of losing money. This fear comes from the internal programming that the money is limited and very important commodity. Most people, during the whole of their lives, learn to associate money with various types of tangible (e.g. property, luxury objects) and intangible rewards (e.g. security, prestige, feelings of self worth). Through this process of association money starts to symbolize deeply ingrained notions of prosperity and freedom. So strong is the association, that any "attack" on the capital base (e.g. by a sharp currency price movement against an open position, or a series of losing trades) is likely to trigger the defensive mechanism in the form of fear to protect the embodiment of so many notions of well-being. This fear can lead to the premature exit of a profitable position - that is before the exit signal is generated by your trading system. It can also force you to not take a signal after a series of losing trading signals or to open position smaller in size than that suggested by your money management system.
The twin brother of fear is greed which arises from the same programming towards the money. The greed can manifest itself in tempting you to hold a position longer than dictated by your trading system - that is beyond the time the exit signal is generated. The greed can make you open a position when there is no entry signal from your system (in which case it would only be the fear of losing a trading opportunity). It can also lure you into greatly increasing your position size after a long series of winning trades - in direct violation of the parameter set by your money management system (percent risked). The pride is similar to the greed in that it forces the trader to commit the same digressions from their trading systems.
To overcome fear and greed all that required is to remember that you are not fishing for all trading opportunities. It would be extremely dangerous to try to take advantage of any profit opportunity that arises - because no system or trader can consistently capture all trading opportunities. You are aiming not for the quick profit but for consistency in system performance and with it for the confidence that you will achieve your profit objective if you strictly follow your system. Your backtesting will also show you that as long as you follow each signal from you trading system and every instruction from your money management system you will achieve your profit objective sooner or later (provided that your system has a positive expectation). It also pays to keep in mind that your systems are only the extension of your pattern recognition abilities. So if you ignore any of your system instructions you are in effect saying that you do not trust yourself - which is a sure sign that you should not be trading currencies.
I have found that forex trading simulator (Please note: The size of this page is 0,6 Mbs and it requires that you have Flash installed and Javascript enabled in your browser)- through its ability to model entirely random trading outcomes - can be of great help to traders and investors who find it difficult to accept that winning systems can go through long losing streaks. If you model a few trading scenarios you will quickly see that systems with positive mathematical expectation tend to turn out profitable in the long run (after 100 trades) - even if they can go through a few losing streaks in the short run. The calculator is also good for reminding traders who sometimes overtrade that any long winning streak is always followed by the losing one - therefore, it pays to keep your positions size within the limits set by your money management system. All in all, forex trading simulator can be very useful for preparing yourself psychologically for the trading of mechanical trading systems in general (not discretionary systems - because you cannot backtest them to calculate their accuracy and payoff ratios).
Quote: "A person's trading psychology can make or break a trading plan. One advantage of a trading system is the elimination of human emotion. The computer makes all of the decisions and the trader is along for the ride. When a trader overrides a system trade, he loses that advantage. How many traders will follow a system trade after it has issued five losers. To reap the benefits of system trading, all system traders should take the sixth trade." from the "The Ultimate Trading Guide" by John R. Hill, George Pruitt, and Lundy Hill. For more information on how to cacluate the probability of any number of cosecutive losing trades please visit here.
If you are trading a mechanical trading system you can solve all the problems created by your emotions by simply automating the trading process. However, if you are using a discretionary trading system this can potentially greatly complicate the trading because you will be using yourself to generate the trading signals. Because the trading signals will be generated by your logical mind and your emotions will be produced by your emotional mind, a conflict is likely to arise when these two minds will insist on opposing courses of action. Needless to say, there is a high probability that your emotions will override your trading signals in highly stressful situations. This is especially true of the starting traders with limited experience. The mental constructs that they have built (e.g. using the books on currency trading) are still very young in comparison to the "ancient" and powerful defensive mechanisms related to money that they have been building during their whole lives. It will take a slightest price shock to activate these "dreaming monsters". This is the reason why the only way a trader can learn discipline in the early stages of his or her career is by following the professionally created forex trading system. Otherwise, there will simply be not enough realistic confidence in the trading system (that beginning traders create on their own) with which they can fight their destructive emotions.
Quote:"Like most traders, I myself am most often my own biggest enemy. This is not only true in my endeavors in and around the markets, but in life in general. Other traders do not pose anywhere near the threat to me that I myself do. I do not think that I am alone in this. I think most traders, like myself, are their own worst enemies." Ralph Vince in his book "The Mathematics of Money Management: Risk Analysis Techniques for Traders".
Beneficial Emotions
Confidence in your trading and money management systems is the primary emotion that is required for the successful trading (defined as %100 adherence to your systems, more on this below). Confidence is very important because it forces you to follow your systems. Have a confidence and the execution will follow (execution precision is directly proportional to how much confidence you have in your trading system). This makes it very important to cultivate this feeling to the extreme prior to starting the actual trading. If you do not have sufficient confidence in your systems this will invariably lead to deviations from them - with drastic consequences for your financial and emotional well-being. Each signal not taken or instruction ignored (for any reason) with subtract from your confidence in your method (similarly to the way the losses cut into your equity). In the end the trading discipline (or the quality of the execution) can be defined as the [(confidence in the method)/(signals not taken)]. The more signals you miss (intentionally or inadvertently) the more this will impact your confidence in the system and the faster your execution will deteriorate, which in turn will lead to further spiralling loss of confidence and worsening of execution. Therefore, it cannot be emphasized enough that the genuine success in currency trading can only come through taking each and every signal that your system generates (which is the assumption of all trading simulators on this site) - be it a mechanical signal or your own hunch or intuition (if you are using the discretionary trading system). By closely following your trading system you are in effect strengthening your own discipline which will, in turn, help you to stick to the system during the hard times (long losing streaks).
Quote: "The only criterion that ultimately matters is that the investor/trader is sufficiently confident about the signals that they will not continuously be doubted. " Tony Plummer in his book "Forecasting Financial Markets: The Psychology of Successful Investing".
To maintain your confidence in a system you should have a long record of its application in the real forex trading which you can compare with the recent results. As long as the system continues to perform similarly to the way it did in the past (without sharp divergencies) you can be perfectly confident in it. It pays to remember that there are absolutely no certainties in the forex trading and the only way you can expect to reach your target return is through It also helps to have realistic expectations of the future system performance. Such measures of the system performance (usually derived by the backtesting) as the average duration of trades, the average value of the loss/profit, the maximum drawdown, the longest winning/losing streak and the rest should be carefully studied by the traders or investors before starting to trade the system with the real money. Knowing these statistics will help to bridge the gap between the expected and the real system performance and, consequently, to reduce the stress and to preserve confidence in the system during the inevitable drawdowns. Some of the authors also recommend downgrading your expectations on purpose - which should be done only if there is not enough information about the real-time system trading performance (the system is evaluated primarily on the basis of backtested data):
Quote:" You can use the "rule of two," as follows, to modulate your emotional expectations: 1. Expect half as many winning trades in a row as you project from your testing. 2. Expect twice as many losing trades in a row as your testing may show. 3. Prepare for half the expected profits." Tushar S. Chande in his book "Beyond Technical Analysis: How to Develop and Implement a Winning Trading System".
Another important requirement for successful currency trading is that you remain committed to the method that you have chosen. Unless you stick to a single method you will most probably fritter away your energies and the capital among a variety methods - abandoning each at the slightest sign of being less than perfect. In fact, there is no such thing as a perfect trading system. All trading systems - without expectations - will go through their losing streaks and equity drawdowns. You cannot escape this. It is best to come to terms with this truth before you begin currency trading - so that there are no unrealistic expectations left to undermine your commitment when you trade with the real money. To strengthen your commitment to a trading approach you should reduce your emotional involvement in any single trade. In other words, you should treat wins and losses with the same emotional detachment (as an example, by stripping the money of its internal connotations). Forex trading is the game of probabilities so as long as you stick to a proven method you will reach your profit objective with time - regardless of "individual personalities" of your current trades (which almost always cannot be predicted beforehand).
Quote: "The only traders who fail are traders who quit." Ryan Jones in his book "The Trading Game: Playing by the Numbers to Make Millions".
Quote: "If you are seriously committed to winning, you can make a zillion dollars/multiply your money 100-fold - over time." John Percival in his book "The Way of the Dollar".
Emotion Management Methods
You can manage your emotions by reprogramming your subconscious mind to channel your mental energy into beneficial use - that is towards forcing you to stick to your trading approach. The first and most important step is to learn to experience emotions only in relation to your trading approach - that is your emotions should be system-related not price-related. In their words, you should shift your emotions from price to trading system - to how well you are following it. No matter what the price is doing now (e.g. breaking to new highs/lows) if your trading system is silent so you should be. Once you get the trading signal from your system you can allow your excitement to move you into placing the trade immediately. It is important to use your mental energy wisely so the only time you can allow yourself to become excited is when you receive an entry or an exit signal from your system. At the same time, grieving about missed signals is much more helpful than grieving about missed opportunities not detected by your system. This is because no single profit opportunity can compare with the possibility of long-term geometric capital growth made possible by consistent application of your trading approach.
This method of shifting you attention and emotions from one aspect of the trading to another with the aim of benefiting rather than suffering from your emotions gave birth to the system or the collection of shifts. The following list includes the above shifts along with a few more helpful ones that you can use in your trading:
- Shift from currency price action to taking all signals: Shift happiness of profits to taking the signals and the sorrow of losses to missing the signals.
- Shift from missed opportunity not detected by your system/any signle trade to the long-term geometric capital growth made possible by sticking to your trading method.
- Shift from profits to losses.
- Shift from a single loss to a series of losses (drawdown).
- Shift from creativity in real-time trading (reduces emotional attachment to any single trade) to the creativity in system development phase.
- Shift from the dollar value of your profit/losses (and the value of goods you can buy with this money) to their percentage value of your account balance.
It should be noted that destructive emotions mentioned above - because of their strong motive power - can be very successfully ustilized using some of these shifts. Rather than fearing to lose the money in a single trade you can condition yourself to fear missing a trading signal and with it hindering the process of geometric capital growth. It is best to desire geometric capital growth than a single chance profit not captured by your system. Rather than opening a trade when no signal is given by your system - because you are proud of a momentary creative impulse - it is better to feel the pride in your knowledge and experience embodied in your trading system - by following only it.
You can make the affirmations/mantras from the above shifts or similar ideas and repeat them daily to yourself to drive them into your subconscious. For example, "I shift my attention from the currency price action on to how well I follow my trading system". As you internalize these principles they will become your silent guiding "angels" that will keep you from the harm in your currency trading.
Quote: "The affirmation is made regularly to yourself, out loud if possible. Hence, for example, the simple statement 'Every day I trade according to my system trading rules' will be a powerful reinforcement to your goal of doing so." Tony Plummer in his book "Forecasting Financial Markets: The Psychology of Successful Investing".
Also, if you treat your equity as your "trading life" all the sound principles of the trading will come naturally to you. Because your self-preservation instinct is a very powerful emotion, if you are able to condition it to accept - however figuratively - that your equity is your trading life you can be sure it won't allow you to take excessive risks (i.e. larger than defined by your money management system) and will force you to take the signals only from your trading system - because only with it you can hope to safely (read - consistently) reach your goals.
One more principle that can be helpful in removing the emotions from the trading is as follows:
- YOU FAIL IN CURRENCY TRADING ONLY TO THE EXTENT THAT YOU DEVIATE FROM YOUR TRADING PLAN. SUCCESSFUL FOREX TRADING IS FOLLOWING YOUR APPROACH WITH 100% PRECISION.
Mastering Emotion Control
To master your emotions you should remember that any currency trading system is, in essence, an organized method to profit from other traders' emotions - therefore, unless you learn to control your emotions you will not be able to profit from any system. The path to the complete mastery of ones emotions is very long one - requiring a lot of introspection and hard work. Because of this, beginning traders are encouraged to automate their trading systems (applies only to the mechanical trading system) - which can sometimes save years of life time. It should be noted that the advantages of the automation of the mechanical trading systems in most cases far outweigh the relative benefits of superior pattern recognition capabilities of the human mind - precisely because the human mind (or rather its logical part which identifies the patterns) is not functioning in the vacuum but alongside other subconscious mental frameworks which often obstruct the decision making process through destructive emotions.
If you still decide to manually execute your forex trading system you can learn to manage your emotions (i.e. remove obstructing mental blocks) through the books which have been written specifically on this subject. One of the best ones are the two books by Mark Douglas - "Trading in the zone" and "The Disciplined Trader" and Tony Plummer's book - "Forecasting Financial Markets: The Psychology of Successful Investing".
Trading and Emotions
Forex-Trends.com
Metatrader
Psychological factors about the trading are well covered in the books, articles and in all sorts of media information and in this article all the ideas about emotions, caused by the “mad” movements of the market, probably will not be new, but solutions how to deal with them for some traders could be a discovery. I am not pretending to be a wizard of the market, but what helps me could help others as well.
Let me first express my opinion, what any trading strategy or investment plan, no matter how good it is, is completely useless without proper execution of that plan. I think here majority will agree without any big argument. But another idea - that not very good strategy, but with the proper execution of that strategy could bring good results - will bring a doubt in our busy heads. And I would agree with you, despite I personally know one Forex market trader who's strength is discipline, not the strategy. And he has excellent results. I think he is an exception. I still think that for successful trading you need a good strategy and discipline to execute that strategy.
Emotions, emotions, emotions... Trading is full of them, movement of the market based on them. Our rush to buy or sell sometimes overflow our plans. And later we question ourselves: “Why did I do this or that?” What is driving us to get into the market when we are not prepared and exit on completely different prices, which completely disagree with our plans? I think it is two major factors: greed and fear.
Greed – we want more! When market goes as we expected, we believe it will continue for very long time. We forgot that everything changes. Fear - we afraid to miss the profitable move or to loose the money. And until fear and greed will dominate us, our results will be very unstable. And worse: if our money management is not the strongest point (usually for emotional traders this is the weakest point), will soon will be out of money, before we even had a chance to establish ourselves as a trader.
Here I am going to give some solutions how to overcome emotions.
First let's start from the trading strategy. I am sure everyone has got one. If not, here my first advice – find one. Do not start “make millions” without a strategy. How and where? In the book stores, magazines, internet. There are plenty of it. Just look around and I am sure you will find lots, but choose just one. Just one at the time. Don't start trading six strategies at once, you will get confused.
So, let's say you have one. Now I have one question: where is your trading strategy and rules? In your head? On the screen? On the paper? Worst answer is - in my head. And here is my second advice – don't be lazy and accurately write it down on the clean paper. Write all your strategy, where you going to enter, where you are going to exit. About how to write a plan or strategy should be separate discussion, so here we are not going to do that. Advice is – write YOUR rules and plans, and strategies.
Next step will be an execution of the plan or strategy. At first it looks simple, you see the price, you know at what price you want to buy, where are you going to take the profit, where you will stop your position. Good. Just do it. Well, reality is - market does not know about your plans and even worst, market is living its own life and definitely, market does not care about your money. Before you go any further, here is my next advice - stop and think. Do you really want to be a trader? Are you ready to accept losses? If your answer is yes, I would suggest one interesting thing to do, before you enter the trade:
Find some quite place and give a promise to yourself: “I am going to execute my trading plan and I will accept any consequences for my actions” This could be your everyday some sort of prayer, until you start following your plan without any exceptions. And when you find yourself in the position, where you do not know what to do, repeat those words for yourself. It will help you to strengthen your discipline. By repeating to yourself , that every action you take is absolutely your responsibility, will make you realize, no one is guilty for your mistakes or losses. Just you. But it is important at this point do not blame yourself. Blame is simple weak point, in other words – another emotion. Instead of blaming yourself, analyse what have you done wrong, maybe is possible to improve trading strategy or plan, and write it on a paper. And when you find mistake of your actions, or hole in your strategy, simply next time do not repeat that mistake, improve your strategy.
By repeating to yourself: “I am going to execute my trading plan....” you will remind to yourself about a plan, which you created and at least you will look at it. That definitely will stop you at least for a moment.
Even if we have a plan, it is very hard to take losses. I know. We all have got a hope, we all believe in some sort of miracles. But at the same time we know, successful trader simply follows it's plan, unsuccessful one has a hope. Do not be afraid to take loss. One loss is not the end of the world. Even few of them in a row. If you are sure that your strategy works, stick to it and soon you will have very positive results. But how to cope with the loss mentally?
Next advice will be – find the time every day for some physical exercises. Any physical exercises will help you to feel better. Do not sit in front of the screen thinking: “I could do this, I had to do that...” Body likes to move and it will give some stress relief. Do not be afraid to get away from the screen. Do not think too much about market. There is certainly more life than markets.
Here is just very few advices how to overcome emotions, but for me they are most important. We did not discussed situations, where after loss we have got enormous desire to get back into the market and make profit (usually it leads to another loss). And certainly did not discuss any reasons why those emotions are taking place. By my opinion that is important, but more important to realize the fact: emotions are part of our lives, even if we do not know why, and dealing with them is the road to success. I can share my views and how I deal with different situations, but this subject is so huge, that requires straight questions. My e-mail is fxquestions@forex-trends.com, and I will try to answer all the question in the form of another article.
