Thursday, 2 June 2011

Fear of Loss

Trading is like any other business in that losses are a part of the game. But losing over and over again can lead to psychological scarring that can paralyze, and fill the trader with dread when approaching the trading table. As Mark Douglas explains in his classic book ‘The Disciplined Trader’, fear of losing actually leads to losing. Stops are placed too tight, not allowing price action to develop. Trades often pull-back after entry which causes the fearful trader to panic and exit with a small loss to prevent a larger loss. A series of small losing trades will eventually empty the account.

The focus should be on avoiding large losses not on small ones. If you cannot cope emotionally with a small loss, you will miss out on potential large moves because every trade you enter has the risk of turning against you. It is vital to know how much you are prepared to lose in any trade. Another catastrophic action is hoping a losing trade will retrace to exit at breakeven. So often however, this leads to even greater losses.

When fear of loss prevents the execution of trades, the trader’s focus may be largely on results rather than following the forex trading plan. This causes doubt about the reliability of the trading plan which gets in the way of pulling the trigger. And thus, a vicious cycle of self-doubt develops.
To combat the fear of losing, paper trading or trading with small amounts enables you to concentrate on execution of your trading system rather than profit and loss. I advise the latter for if you trade with small amounts of real money you will experience the emotions of the market but at a lower level, and you can gradually accustom yourself to them.

The money you put up is money you can afford to lose, and can be viewed as the cost of education like a college degree.

Pure paper trading does not pull up emotions as nothing is at stake.

When you can trust yourself to execute your trading plan without exception and when you can enter and exit the market with decisiveness and without hesitation, then you can consider going live.

1 comment:

  1. Great info on trading. You know your business and post more great comments at Living Off The Grid Today.

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