Tuesday, 3 January 2012

How to Avoid Taking Profits Too Quickly and Staying with Losing Trades Too Long

Does this sound familiar…
“Most of the time I earn a few pips and close out the trade because I want to catch it while it is still profitable. But when the trades goes against me I will hang onto it too long thinking it will come back to profitability but I get scared and close it out so I end up losing more. And then, what’s really frustrating is that the trade ends up moving in the direction of my original trade. How can I learn to ‘stick with my trade’ ?”
This is a great question and it is something that all traders, especially in the beginning, have a challenge with. It is also something that is gained through experience.
A key thing that a trader must do is acknowledge that you will have losing trades. If a trade moves against you, as a trader you need to be willing to accept that loss just as you are willing to accept the winning trades. Since you are trading with risk capital, money that you can afford to lose, a trader must be OK with that loss as it will not affect their life style one tiny bit. Losses are simply a part of trading.
(If you are not trading with risk capital, stop trading!)
Once a trader accepts that concept, they will be more inclined to let a trade “play out” and not jump at the chance to lock in a tiny bit of profit or become distraught as a trade begins to move against them and close out the position.
Next, be certain that you are taking only the higher probability trades, those that are in the direction of the trend, and that your entries are based on a solid technical reason such as a break of support or resistance. When a trader knows that they are trading a pair that is in a strong trend, they will have the courage of their conviction to be able to “stick with the trade” as it is in a strong trend. (This does not mean that sticking with a trade in the direction of the trend will insure a winning trade. It does mean, however, that you will be taking trades that have a greater potential for success.)
Once you have decided on the higher probability pair you will trade and know where you will place your initial stop and limit, when the trade executes…leave it alone! Promise yourself that you will only let the trade limit out or be stopped out.
Lastly, be sure that you are following the principles of Money Management. So when the losing trades occur, your losses will be small and manageable.
Practice this discipline many, many times in a Demo account until you become comfortable with it.

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