How to Stop Giving Back Your Profits When Trading Forex
"How could I have just done that?" If you've never yelled that to yourself in fury, you're not a Forex trader. Even the most intelligent Forex trader has done some really stupid things when just starting out. To understand what went wrong, and why, it helps to understand what goes on inside your brain when you make decisions about money. When you understand it, you can stop making the mistakes you are wired to make.
Forex traders are often their own worst enemy. Everyone knows that beating the market is nearly impossible, yet just about everyone thinks they can do it.
How many times have you done any of these? Be honest now!
-Watched a trade go bad, hoping and willing it to turn around, until you have lost more than 10% of your equity?
-Closed out a trade and re-opened immediately in the opposite for an ultimate loss?
-Seen some price action and immediately jumped into the trade?
-Traded without a stop loss
-Placed a sure trade with 10 times the lot size you normally trade because you are sure it is going to be a winner?
Traded with more than 5% risk to your account?
If you have never made any of these mistakes, congratulations. However, these and other similar mistakes is why 95-98% of new Forex traders ultimately fail.
The thing is, our brains were originally designed to get more of whatever would improve the odds of survival, and to avoid whatever seems risky. The investing brain is far from the consistent, efficient, logical device we would all like to pretend it is. Even Nobel Prize winners fail to behave as their own economic theories say they should. Emotion gets in the way. We are wired to feel the rush of pleasure when we might make money and panic when we are losing it.
A lot of information about how everybody's brain works has been determined through neuro-economics, and understanding those basic lessons will make you a better trader.
1. A momentary loss or gain is not just a financial or psychological outcome, but a biological change that has profound physical effects on the brain and body. Financial losses are processed in the same areas of the brain that respond to mortal danger. When you lose, your heart races, but you also get negative emotions like disgust and guilt. When traders are disgusted with their own blunders, their natural aversion to taking a loss finally breaks. Instead of grimly hanging on as usual, they now become desperate to get rid of any other losing trades. Desperate people do desperate things. That is why a market will often crash faster than it goes up. Traders tend to buy in dribs and drabs, but sell in one fell swoop. Many charting patterns are based on that trading psychology.
2. The anticipation of making money feels better than actually making the money. The brain is more aroused when you anticipate a profit, than when you actually get one.This drives illogical trading such as is often experienced by amateurs. They close down losing trades and immediately chase the trade in the opposite direction, or open illogical trades based on hope rather than a sound analysis and prediction of success. The feeling of anticipation is very strong, lighting up the brain much stronger than when a trade is closed for a profit. This drives illogical trading.
And, interestingly, the area of the brain that lights up when money is made is in a different location to the area lit up by anticipation. It is not the area linked to happiness, lending weight to the saying "money doesn't buy happiness".
3. The neural activity of someone whose trading is making money is indistinguishable from that of someone who is high on cocaine or morphine. Being a 'trading junkie' means that trades are opened for the thrill, the rush. Successful traders will tell you that trading is actually quite boring, because they have learned to limit their trades to high-probability opportunities. In other words they have conquered their neural addiction to the trading 'high'. Amateur traders seek the rush, ignoring their plan, logic, and common sense in their pursuit of the rush.
4. After two repetitions of a stimulus, like, say, a currency pair goes down with two bearish candles of the same length, the human brain automatically, unconsciously and uncontrollably expects a third repetition. If that does not happen, fear and panic set in. Scalpers, who are watching the charts carefully, can overreact to this surprise by closing out the trade prematurely.
5. Once people conclude that a currency pair's behaviour is 'predictable', their brains respond with alarm if that apparent pattern is broken. Amateurs respond to that alarm, cutting short trades that might have ended up profitable.
The other thing that works against us is our subconscious programming about money. Many of us are "taught" or programmed at a young age beliefs about money that do not serve us. How many of us have heard the following, let alone believe it themselves:
-Money is the root of all evil
-You must be a crook to be rich
-You have to work hard to earn lots of money
-I don't deserve to be rich
-I'll never be rich
-Money happens to other people, and you have to do something rotten to others to get it
-etc etc
Many of us are not aware of this programming and so continue to saboutage our efforts to get rich or at least make a lot of money unconsciously. We simply aren't aware that we are responding to stimuli such as is described above and letting ourselves do it over and over without learning from our actions. We stop ourselves from not consciously behaving differently. We get in our own way, in other words.
So, what can we do? That is a darned good question.
There are three "simple" steps. I say simple, because they are easy to write. They are less easy to do and take a lot of discipline. But, you know what? So does trading successfully on a consistent basis.
1. Firstly, understand what your beliefs are about money. Deal with those limiting beliefs and clear them out of the way.
2 Secondly, develop a code of behaviour, and stick to it.
3. Thirdly, have some sort of accountability framework.
I'll deal with each in turn.
Understand Your Limiting Beliefs
This is best achieved by keeping a trading journal. Every time you place a trade, notice what emotion you are feeling, and what thoughts are going through your head. Write that down. If you don't do it every trade, at least do it at the end of every day for three weeks. If you can't stick to it every day, that will tell you something. It may tell you that you lack basic discipline. It might tell you that you are getting close to what your beliefs are and they are running from detection. It does tell you that you will never trade successfully until you can do this for 21 days, straight. Trading successfully takes a lot of self restraint, and discipline. That is why 95 - 98% of wannabes fail.
Once you have identified your limiting beliefs, you then need to decide that they no longer serve you, let them go, and replace them with something more suitable. The trick is to write it down as if it is in the present.
So let's say your belief about yourself is that "I'm just not the kind of person who makes a lot of money." It's kind of a nebulous, "applies to all situations" kind of belief. Holds you back perfectly from getting what you want.
Reframe this limiting belief by writing "I am the kind of person who makes money easily and effortlessly. I live a very abundant life, simply because I AM the kind of person to whom financial well-being flows." Write it down 22 times every day, for 11 days. If you miss a day, then you must begin again. Watch what thoughts and feelings come up.
Develop a Code of Behaviour, and Stick to It.
This is best achieved by preparing a trading plan. Arrest your desire to place hurried trades. Stop, and analyse that trade against your plan. Write down the logic behind that trade. You should update your plan as you encounter situations where it was not helpful.
This will prevent impulse trading, forcing you to consider why you are going to place that trade and why you think that it will win. Know why you entered the trade, and at what point you will exit the trade. And if you are going through a bad day, and that happens to the best of us, stop and reflect. There will be some hints why your trades are going against you. It will often have something to do with the news announcements and the overall investor/market sentiment that is volatile that day. Don't try to make your losses back on a losing day. Understand what is going in with your neurophysiology and understand your primitive brain is driving you, not logic.
Have an Accountability Framework.
An accountability framework means having someone watching over you and calling you to account. This may be just yourself, a partner, trading buddy, coach, or a bunch of strangers, such as in a blog or forum posting.
The way to bring yourself to account is to analyse each trade, what you did well, what you didn't do well, and why. Update your trading plan, and modify your trading method if required. The most important thing is to make life changing decisions as a result of your reflection on your trading.
The key to having an accountability framework is honesty. It is very compelling to hide your head in shame when you mess up, but honestly, that is the most important time where true breakthroughs in your trading style happen. Honestly appraising your disasters turns up the pain dial, so to speak, and makes change a much more compelling option. Avoiding the pain, whilst alluring, means you avoid the opportunity to make a significant change in your behaviour.
Hi I have been trading for around 5 years now and lost my account a number of times. It wasn't until I went from $23 to $35,500 and back to having my account closed in three weeks that I realised that I could make money, but my brain wasn't letting me keep it. I have been researching that topic ever since and sharing my knowledge with others as a genuine attempt to help others avoid my history.
