Couple of days ago I was having a chat with one of my mentees. I asked him how his trading day was.
‘I started very well this morning’, he said. ‘I had two winners and was in profit by 40 pips (£200). Then I took another trade, which looked okay as per my trading method and plan. It turned out to be a loser.’
I assured him that was not a problem as long as he followed his plan and proper money management. Losing trades are part of a trader’s life.
He then said, ‘Actually I lost more than I should have’. Puzzled, I asked, ‘did you not have a stop?’
He said, ‘I did have one – a mental stop of 17 pips for a potential target of 34 pips. But this trade started going against me and when the price action hit my mental stop, I couldn’t get myself to close the trade. I held it a little longer hoping it will return, and then a little longer, eventually losing 40pips and the profit from both the earlier winning trades!’
Does this sound familiar? I am sure many of my trader friends would relate with this. I for sure have been there and done that.
Let’s analyse why this behaviour happens though. The concept of mental stop is a reflection of fear. If there was no fear why would you not put a hard stop on the trade? The fear could be from being unsure because of not following your plan (i.e. just jumping into a random trade outside of your plan), or simply because you fear losing money.
If you fear losing money on trades, I strongly suggest reconsidering your choice of trading as a business. As this is not a mindset conducive for long term success at this business. Getting losing trades is an integral part of this business, sometimes many in a row. Even the most successful traders have their share of losing trades.
Another form of this fear is to cut winners short or moving stops to break-even far sooner and strangling an otherwise winning trade. This behaviour is the other side of the same coin, which emanates from fear of losing the gains, or sometimes driven by the immediate gratification of booking a win.
Humans fundamentally seek to avoid pain. Perhaps through millions of years of psychological programming we have evolved to take evasive action from a potential pain or risk of pain. It’s how we are built. Therefore not to react to risk of losing money in a way is counter-intuitive. And this, I reckon, is why it is one of the hardest aspects to master in trading journey. If you are not ready to lose, you cannot win in this game.
There is a song that goes like this ..‘Scared money don’t make no money’ which I find very relevant to trading. Look-up on YouTube, have a listen and relax.
Trading the financial markets (Stocks, Forex, Futures, Spreadbetting etc) has risks associated with it. Whilst it can be extremely rewarding, it can also result in losses, which if not managed properly can exceed your initial investments. Before embarking on trading, please ensure you understand the risks involved.