How To Avoid Revolving Round The Circle Of Trading Disaster

If you’ve been trading for any amount of time you should know by now that those periods constituting the dips on your trading investments equity curve aren’t really that easy to get past without making some serious irrational trading decisions only adding to the size of your loses.

This owes much to being a victim of what I like to call the circle of trading disaster without even consciously or subconsciously knowing it as the case is with lots of traders all around the world.

Almost always except for some extremely dumb I-have-lost-my-trading-mind moments an instance of which was when I traded my Tuition on a 1:1000 leveraged account with a standard lot size and lost the entire money in less than 5 hours, big losses always start out small making you feel reluctant to manage them simply out of the fear that the market might turn around at some point so you needn’t have to give up any pips just yet.

Usually when these small losses start ballooning out of what for lack of a better word I would like to call proportion, we usually start developing the emotional attachment of a fools love for some pretty lady with our losing trades, never able to let them go (closing them at a loss), and always hoping for the best (adding larger lot sized position to hedge for losses quickly covering our already over full blown losses).

Traders generally fall victim to this gross trading indiscipline when they’re stop loss targets do not hold any psychological significance to them this is usually because most struggling forex traders do not use point of validity stops.

As opposed to just coining some static or mathematically formulated dynamic stop loss target devoid of discretionary trading soul like say, 20 pips when your leading technical indicator makes that little squiggle up there or 35.6 pips when its squiggles down here, a point of validity stop is based on common sense reasoning and logic.

Ok, to drive this point home picture this example, the EURUSD 30 Minute chart has just moved from a transition to a mark up market cycle after being in a downward move for the past 3 days. The Transition move itself you missed for some reason but now the first leg of that move has just retraced respecting the 23.6% Fibonacci retracement level another soft nudge telling you that the move is worth some serious momentum.

The formation of a hammer candlestick right as the New York Session opened followed by the a long real body change of direction candle breaching the 2 week major supply trendline would be more than enough signals for the average trader to open a long position, at least I would.

The problems starts when for some reason price just turns around and just keeps going against you, if you were using some stop level you probably got instructed to use you could place the stop too close and hurt the trade prematurely and if you put the stop further away than it needed to be you risk losing more than necessary on this single trade, what do you do?

Smart question, all the trading tools gauges and dials in the above example if you haven’t noticed are sound indications of the shift in the market psychology, let’s list them and see;

• The Transition from the mark down to the mark up market cycle
• The abrupt stop and continuation of price move at the 23.6% fib retracement level
• The Sudden influx of Long orders right at the New York open further reinforces any savvy trader’s confidence in the euro appreciation which has been justified by more and more buys positions and a steady up move.

Taking all this variables into account to get into a trade only to lifelessly dictate that the most room we will be willing to give the trade to fruition is just 20 – 30 pips is somewhat like trading injustice, your crime being too biased on trade entry and totally rigid on trade management and exits which are equally if not even a bit more important to trading success.

A point of validity stop for our above euro trade example will be something like a .00 psychological level below our entry price or a down channel trendline breach or even the breach of 2 consecutive Fibonacci retracement levels. These types of stops ensure that risks are realistically calculated and placed to give any trade all the room it needs to prove or disprove the accuracy of your charting and market analysis.

Trading becomes more or less hands free and second nature when you focus on spotting and selecting the best trading signals with promising returns on investment offering the lowest risk, and perfecting the skill of flawless trade entry, execution and management.

Strategy jumpers constitute the majority of the victims of the circle of trade disaster which usually start with the hunt for the Holy Grail forex trading system, after which they demo trade the system so to say for a few weeks and then move on to test it on a live account with real money only to watch it gone within days. Dumping the system and telling them how they always instinctively knew that it just couldn’t work because of its simplicity, it just might have had a chance if it was a bit more complicated.

The vast majority of the so called online automated forex trading softwares or robots also operate on the same rigid/lifeless form of risk/reward management which totally ignores paying more discretionary attention to trade entries, management and exits.

The death circle usually starting out with a small losses whose stops you adjust a bit to accommodate price movements which seems to be moving against you rather unfairly leading to the escalation of your losses when you open more of the same trade position only this time with larger lots to quickly cover for losses when the market turns around only it doesn’t turn, it only keeps moving more and more pips against you giving rise to negative emotions the like of which constitutes greed, fear, anger and anxiety all in one unexplainable shot of mixed feelings, oh the feeling of pain we endure for the sake of trading.

Equipping yourself with the right forex trading education is among the first steps to fighting the circle of trading disaster, believe me when I tell you that “Trading ignorance is not bliss” contrary to what you might think.

Article Source: http://www.streetarticles.com/day-trading/how-to-avoid-revolving-round-the-circle-of-trading-disaster