The psychology of closing the winning trades too early, while leaving the loosing ones to run

Oct 24 • Forex Trading Articles • 1455 Views • Comments Off on The psychology of closing the winning trades too early, while leaving the loosing ones to run

Why is it that we appear to get over excited with winning trades and close them early, in order to bank the profits and yet we allow our losing trades to run, desperately hoping and praying that they’ll somehow turn around and come back into profit?

Psychologists have begun to explain the process by establishing that we experience the emotional pain and disappointment of losing, far more than we experience the joy and excitement of winning. They can’t offer a full explanation as to why the win-loss phenomena is experienced differently, neither can they offer up much in the way of a coping mechanism, presumably because it’s a betting, or trading related issue on which there’s precious little research. However, if we begin to analyze our feelings and emotions in more detail, during our losing and winning experiences, and we overlap it with timing, then perhaps we can begin to solve the puzzle.

When do we panic most, regarding banking our winning trades?

We’re far more likely to panic after suffering losses in series when day trading. Perhaps we’ll lose three trades in series, losing approx. 3% of our account size and when the next trade moves into profit, we’ll immediately close it too early, feeling relieved and thankful that at least we’ve clawed back some of our losses. In doing so we’re corrupting our trading plan and interfering in what may be, in terms of probability, a natural cycle and random distribution between winners and losers. We need to recognize that on occasion we’ll find ourselves in trading turbulence; we’ll find ourselves on the wrong side of the market and at other times we’ll be on the right side of the market. There’s very little or no control we can have over this, we can’t control the market we can only develop self-control, and that self-control must extend to obeying the rules we’ve embedded in our trading plan.

This impatience to simply bank any profit, however little and however early, will be naturally corrected by experience. Us older, (arguably) wiser traders have seen it all before, therefore we know that a small series of losing trades is part of the price we pay of doing business in our business. What we don’t do is immediately corrupt or curve fit our trading plan, in order to accommodate recent market movements. If that’s a bad habit we develop at the outset, then when would we stop constantly micro adjusting our method and strategy?

Visualize our engagement with the market this way; we have to lay out our net in order to catch our fish and we have to very quickly develop patience by sitting with our nets cast, just waiting for the fish to bite. If we’ve placed the nets in the right place we’ll profit, if we haven’t there’ll always be another day.

 

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Some days the effort won’t be worth the reward therefore we’ve incurred a loss, other days we’ll take a great catch, some days we’ll break even, but we must regard all days as part of an overall business like process, the winning and losing days aren’t individual catches, they’re part of the bigger picture. We try to remain just as emotionally balanced during the bountiful days, as we do during the famine days.

The market will come to us, we can’t chase it. It isn’t a battle, the market is not our enemy, it’s a simple construct that, with the right tools and mindset, which are all at our disposal, we can have an opportunity to profit from.

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