This is a very touchy subject for many traders, because the primary reason why people go into the currency markets as an investment strategy is to make money. A business that does not yield positive returns is generally something people do not wish to associate with.
We all know the FX siren song, how trillions of United States dollars flow through the currency markets on a daily basis, and how it is easy to get a small chunk of that pie as a retail trader. This is very true, but where some traders get it wrong is when they expect to make money all the time.
The fact of the matter is that, there will be good and bad days. And the bad days can be very lousy, and can make a trader really doubt his ability to make profitable transactions.
But the bad days should never overshadow the good ones. When I say overshadow, I am not referring to our feelings or emotions.
No! I am referring to the monetary profit or losses of those good and bad days. This article is aimed at creating a right trading mindset to losing in the currency markets.
The first thing we should realize is that as people going about our daily businesses, we are always exposed to risk. On an average day, there are so many things that can go wrong.
You can have a flat tire on your way to work!
If you do not have a car, you could miss your bus at the bus stop and get to work late. Or worse still, you could get hit by a bus!!
I agree that the last part is a bit extreme, but the fact still remains that people still get hit by cars and buses on a daily basis. And some of these things that happen can be completely out of our control, but that does not mean we lay in bed all day and refuse to go to work; life must go on.
Just as living as its inherent risks, so does trading. The big difference between the risks associated with both is that as a trader I have full control over my risk exposure. Of course, we know we can have slippage and weekend gaps, which can be costly to us. But ultimately, every trader has full control over any risk associated with his trading account.
The trader controls the trading volume, the entry price, the exit price and the target. At any point in time, a trader can decide to opt out of a trading position or decide to hang on to the trade. The only thing out of a trader’s control is how the market will react once he has a position in place. A trader cannot control the market, but he is king over his account.
Notice how people are quick to allocate blame when something bad happens; and how there is a need to shift blame from oneself; well the currency market has no room for that. The trader is solely responsible for every loss incurred on the trading account.
So when a trader experiences a big loss, or when the market moves violently against a position; it is not the brokers conspiring to deplete his account; it is what I would call irresponsible trading.
Realizing that trading has a lot of risk is only the first step to succeeding; the next step involves accepting that risk. As an individual, I do not like surprises, which is one of the reasons I try to avoid trading during news releases.
A trade can have one of two outcomes, either it succeeds or it fails. And when it fails, the result should not be a surprise. It’s a trader’s responsibility to know how much he is going to lose if a trading plan does not work out.
If the amount being risked makes the trader uncomfortable, then logic dictates that he either reduces that amount or does not take the trading position at all.
I will use myself as an example. After the new rules were introduced in the trader contest, which required traders to keep their drawdown below 60% to be eligible for any prizes, I have mentally allocated a risk amount of between 16,000 - 25,000USD for every trade.
The best way to understand my loss acceptance is to view my cancelled orders, because once the trades get activated, I am quick to secure my positions. The pictures below show some cancelled orders and some losses.
My Stop loss usually ranges from 11 – 40 pips, which at 5M trading volume translates to 5,000USD – 20,000USD. But limiting my exposure, it means I will have an opportunity to remain in the market longer. This prevents a sudden bad trade from causing major havoc to the account. This is what I refer to as the “Single bad trade” syndrome, a situation where profits from several profitable trades are erased by single bad trades.
Let us consider the equity graph below:
This usually happens the Stop loss on a trade is very large, and when a reasonable amount to be risked has not been determined. An ideal equity graph should have dips or controlled losses, and at the same time should always reflect a progressive increase in equity. I will share my equity graph for the month, and my trading statistics.
Overall, I have had 64% success with my trades. This means I have had 36% losing trades, but I have been able to limit the risk from totally desiccating the trading account.
There is much debate about putting a Stop Loss too close to an entry point, I know this but I am also not prepared to lose more than the amount allocated to possible loss during a trade. This is a very good and effective trading habit.
By controlling risk, there are no surprises. We know how much will be lost if things go wrong. At the same time, we know there will be much opportunity to make profits from the market, so as long as risk is controlled we have a slight edge with our money management plan.