Since no human can see into the future, unfortunately new and experienced traders alike will sometimes have to contend with losing trades.
Emotions can run high at these times. Watching your hard-earned money being depleted from your account is an uncomfortable experience - and it can compromise your decision-making abilities.
That's why it's important to decide - right at the outset - where you'll get out if this trade doesn't go well.
Rule 1: Always have an exit strategy
You need an exit plan - a strategy for managing the risk of the position, so that one bad trade won't wipe out a significant chunk of your trading capital. But simply telling yourself where you want to get out may not be enough.
Consider the scenario: you head to bed for the night with a position going well, but by the time you wake up in the morning the market has taken a turn against you.
Or perhaps you're watching a position while travelling on the train. You enter an area with no mobile or wifi service, and by the time you get back online the market has moved past your planned exit level.
So once you’ve decided where you’ll close the trade, you need an automated mechanism to protect you when you’re not in control. And that’s our second rule:
Rule 2: Set a stop
Setting a stop reinforces your exit strategy. The resting order will close your position if the market hits the level you specify, even if you're not logged in to your platform at the time.
It also removes the need for you to make a difficult decision under pressure.
It's easy to disregard the emotional aspects of trading. But, especially when you're new to the markets and still learning, the rollercoaster of feelings created by losing a trade can have a substantial impact.
Let's say you take a long position and the market immediately starts to rise, putting you into profit. However, suddenly it goes into a sharp reversal, and to your dismay your winning trade rapidly turns into a loser.As the position drives further below your entry price, you keep hoping for recovery. But that hope turns into wishful thinking as prices continue to deteriorate. Finally, you're left with a feeling of desperation. It's clear that prices aren't coming back anytime soon, and you have no choice but to realise a loss.
In this situation, the financial impact certainly stings. But it's the emotional toll that can make your next trade more complicated, as you try to recover. Just one idea that didn't work out could define how you move forward in a market. For example, you might feel tempted to rush into a new position without proper consideration, in an effort to claw back your losses as quickly as possible.
One easy way to help avoid this issue is to decide where to set your stop before opening a position, and set it up while executing the trade, so your position is never left unprotected.
With a stop-loss order in place at your pre-defined exit level, if that price is met you don't have to make a decision about to what to do. You've done your planning in advance, and your position is closed for you.
Controlling emotions that hold you back
So far, we've explored many different aspects of the financial markets and the techniques of trading. But there's one key component that affects the success of every trade you make, and that's you.
No matter how strong or level-headed you can be, you are a human being, so you have emotions. And naturally your feelings can influence your thinking and your behaviour as a trader.
Trading is an exciting and absorbing activity that can bring you moments of euphoria when things are going well, while equally it can be psychologically tough if markets turn against you. By understanding the emotions you're likely to experience at every point in the trading process, you can mentally prepare yourself to handle them effectively. That way, your feelings won't get in the way of your decision-making or harm your potential profits.
In this course, we'll look at some of the emotions you may need to deal with when you trade.
Anxiety and doubt
It's great to be cautious and considered in your trading, but if your worries are crippling you that's counter-productive.
The transition to a live trading account after using 'play' money in a demo environment is one step that worries some traders. It's a bit like doing a parachute jump: you've learned the theory and done all the preparation, but making that leap still takes courage.
Live and demo
There are, however, things you can do to make it a little less daunting:
· Reflect on the lessons you learned while using the demo account
· Apply the same strategies that brought you success in demo trades
· Follow a trading plan
· Start by trading in small sizes until you feel comfortable
· Use risk-management tools, such as stop-losses
As long as you trade sensibly, use the skills and knowledge you've already gained and keep your positions modest, there's every reason to expect success. Of course you will make mistakes - we all do - but by managing risk carefully you'll minimise your losses.
Fear of loss
Another time that you might experience fear is when a position is moving against you and you begin to see a growing loss.
Imagine you've bought EUR/USD because your analysis strongly suggests it's about to rise. You've considered the risk involved and set a stop-loss.
However, as time passes the currency pair seems to be stuck in a downtrend. It hasn't hit your stop, but the rise you predicted remains elusive. You start to feel nervous: should you close the position now and cut your losses? Should you adjust your stop closer?
Before taking any action, ask yourself:
· Was my original analysis flawed?
· Have circumstances affecting this market changed since I opened my trade?
· Did I place my stop at the wrong level?
If everything suggests your original analysis is still valid, and if you've positioned your stop correctly to protect yourself against unacceptable loss, there's no reason to alter or kill your trade. Have confidence in your original judgment and let things play out - your loss could turn into a profit.