How our fear of losing can be a dangerous issue when trading Forex

How our fear of losing can be a dangerous issue when trading Forex

Jun 28 • Forex Trading Articles • 52 Views • No Comments

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As we’ve discussed many times, none of us like to lose. As forex traders we’re both curious and competitive, we’re also natural experimenters. If we were extremely cautious, only liked waging on what we think are “sure things”, then we’d never contemplate trading as a hobby, or career. Instead we’d simply leave our spare funds, or savings in a deposit account, ‘earning’ a negligible, or zero rate of return.

However, for those amongst us who are adverse to risk and who perhaps enter the world of trading to improve the meagre returns on our savings, trading often provides many barriers to our development that can prove to be extremely damaging to our progress. But there’s a massive bonus and upside to being a risk adverse person; various studies suggest that those amongst us who don’t have a material inclination to gamble, often make the best traders. These more careful individuals, perceive the challenge of trading to be more of an intellectual exercise in financial engineering, as opposed to being a ‘punt’ and a form of online, combat sport.

Set you mind to be prepared for losses

Developing the mind set to accept our losses, to simply shrug our shoulders, dust ourselves down, move on and go again, does represent quite a challenge, but there are ways of using each loss for our benefit and it involves primarily viewing each loss as the price of doing business in our business.

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We have to accept that losing trades are an inevitable part of trading, we need to enter trading knowing that no trading strategy is 100% successful. We also need to recognize that even trading strategies which return one in every two trades being profitable, can result in an extremely healthy return. For example; if 50% of our trades are losers, but our profitable trades generate greater returns than our losing trades incur loses, then we’re profitable. Simply by looking after the bottom line, we should be taking care of the top line, the expression; “look after the bottom line and the profit will take care of itself” is one many experienced traders are fond of using.

Becoming emotionally neutral when we incur a loss doesn’t require practice, it involves developing a trading strategy that (at its core), already accounts for losses. If you’re a novice trader then one of the first thought experiments and exercises you should subject yourself to is asking what percentage of losses do you expect to incur in your trading; maybe 20%, 30%, 40%? As we’ve pointed out even a 50% win loss ration can prove to be profitable, but if in our plan and if our mindset is already attuned to accepting losses, then we’ve immediately overcome one of the major hurdles preventing our evolution as a trader.

The trading industry has a virtual graveyard buried with traders who chased a holy grail, who were petrified of incurring losses, it’s imperative that you don’t become one of them and here’s a few clues to look out for:

•    You’ll curve fit your trading method for each and every manual trade you take. Typically you’ll be using an indicator based strategy, let’s suggest it primarily involves the MACD. You lose and you then alter the standard settings and or the time frame, to reach the point whereby you wouldn’t have lost the trade. You’re now completely ignoring the fact that you’re violating your trading plan and critically altering your risk parameters. But you’ll then use these new settings on your next trade and if that’s unsuccessful, you’ll alter the strategy once again.

•    You immediately cancel you method and search for another one. You may have endured a small series of losses, you then decide to cancel the existing method in your trading plan, instead concentrating on discovering a new method.

•    You panic as each loss is experienced and reduce your risk to the point where it’s now impossible to generate a reasonable level of return. Perhaps your risk was 1%, then you reduce it to 0.5% or you risk a set amount of currency per trade, again completely corrupting your trading method and the critical constituent issue of risk.

Identifying your issues and then applying straightforward and simple remedies can combat our fear of losing. Taking care of our risk and applying a proven method, allied to gaining peace of mind through losing our fears should put traders on a successful trajectory.

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