MANAGING YOUR EMOTIONAL EQUITY & TRADING CAPITAL

[FX4Newbies]

Hello Trade2Win Community,

In this thread, it is my goal to discuss the heart-mind issues that traders experience via discussions, and also from an experiential standpoint, i.e. through looking at and studying actual trades (via videos). Why actual trades? It is because during the trade itself is when the emotions tend to surface. In my trading journey, I have seen people panic when losing, which I think we can all understand, but it can also happen when winning. Emotions can be very tricky, and so in order to succeed at trading, we need to be able to handle them (the emotions) in a way that works for us.

This thread is about discussing and finding ways that would help traders to manage themselves better. Of course, a trader would also need a sound trading method or edge which they are able to trade. Once that method is in place, and the heart-mind connection is solid, then the path is ready for a trader to be the best they can be!

This thread is for traders who want to succeed at trading.

Looking forward to the journey!

 

[FX4Newbies]

Starting off, I would like to make some foundational statements:

1. Every trader is different, so each trader needs to have an understanding about what their emotional triggers are in trading.

2. Traders MUST accept the fact that trading is risky, and they can and very likely will lose money at some point.

3. The price action is designed to trigger the emotions of the fearful. If you trade impulsively, jumping in without a system or method, you're already trading on the proverbial "wrong foot".

4. Fear of loss is one of the most deadly fears in trading. There are others which we will discuss.

5. The trader is responsible for bringing COURAGE to their trading. There is no escaping it.

We'll take a look at this further...leaving this here for now.

 

[FX4Newbies]

Here's some FOOD FOR THOUGHT as we continue this discussion.

Most Forex brokers report that close to 80% of retail traders lose money. The question is, "How can that be possible with all of the FREE Forex information online?" Even brokers' websites offer free education. Well, the truth is, it takes more than information. Most people think that if they can just learn to trade, they will be able to trade. The question becomes, "Learn what and how?"

So where should a new trader start?

1. Should they open a Demo Account and go about learning a trading method?

2. Should they first speak with a good trader to get some other details before jumping in?

3. Should they evaluate their trading mindset?

4. Should they assess their fears about losing money?

All of these points for sure are part of the journey.

Many new traders though are caught up by the potential of making large sums of money, but never accept the reality that they can lose. Their expectation of the markets is skewed. Truth be told, most people have not been conditioned mentally or emotionally for trading in the financial markets, and especially the Forex Market, which is VERY volatile.

As we prepare to go deeper into the trading journey, begin to examine where you are, regardless of whether you're a Newbie or not. Be honest with yourself and write down where you'd like to be as a trader...not just the pips you'd like to be making, but the person making those pips.

We'll pick up this discussion from here...

 

[Simon54]

Agreed with the pointers. I appreciate you taking time to write them.

 

[FX4Newbies]

Agreed with the pointers. I appreciate you taking time to write them.

Most welcome Simon54. My goal is to help traders trade2win...literally! Without certain key things in place, traders could find themselves at it for years, not really knowing what the hindrances might be.

 

[FX4Newbies]

So, let's continue...

Maybe you are new to trading... a complete Newbie, or already trading but still trying to find your way. Where would be the "safest" place to start?

We already know you need two key components for sure (apart from the trading device and platform etc.):

1. A solid trading method.

2. A professional trading mindset and suite of emotions to manage yourself when trading.

That being the case, where should traders start their journey? Well before looking for a video online to "teach" you, or opening a Demo Account so you can get happy clicking and watching the profit and loss fluctuate, assess your view of money. Attached is a simple questionnaire that would get you to start thinking in the right direction.

Understanding how you are currently conditioned to manage risk (loss) is a BIGGIE! Most people, regardless of their success in other areas of life, are not conditioned to handle the "risk" associated with the loss of money. Why is that? Well, it's not just the money that is lost, but what that money represented to them...which is why you should not trade with money you cannot afford to lose. That attachment needs to be addressed by the trader.

There is so much that lies beneath the surface of trading successfully. For now, complete the questionnaire and do some introspection.

In the next post, we'll take another step.

 

[FX4Newbies]

Hopefully you have used the questionnaire to ask yourself some very key questions about money. What next?

The next step is to begin to plan how you would be able to make this a reality.

Step 1: What is your daily, weekly schedule like? Do you have time to spend sitting in front of the screen or do you need to trade on a more long-term basis?

Step 2: How much trading capital do you intend to start with in your LIVE account?

Step 3: Assess your levels of PATIENCE, DISCIPLINE, PERSEVERENCE AND COURAGE. EMOTIONAL INTELLIGENCE is critical. These are key ingredients you MUST have as a trader. Can they be developed. Oh yes...but it usually takes determination and consistency. The time it takes will vary from trader to trader. Believe it or not, once you have a reliable and solid trading method that you can execute, your personal development becomes the linchpin to your trading success: as you improve, your trading should improve.

Once you have processed through these three steps, draft a tentative TRADIING PLAN. Your trading method that you select should be one that harmonizes with all three steps.

In the next post, we will begin to discuss the types of methods that traders use.

Until then...


Take care,



FX4Newbies

 

[FX4Newbies]

As we begin to transition into the available methods for trading, know that every method does not provide the same degree of reliability on a consistent basis.

Next important point: when looking for trades, you should be looking for a trade that provides these two factors:

1. A LOW-RISK entry.
2. A HIGH-PROBABILITY profit target.

Your trading method should be as sharp as possible in giving you trades that meet both of those criteria.

In the next posts, we'll delve into those 2 points in more detail.

Stay tuned....


FX4Newbies

 

[FX4Newbies]

So, here's a question for you:

Which buy entry was the best example of a low-risk entry? BUY#1? BUY #2? or BUY #3?

Feel free to state your reasons.


FX4Newbies

 

[FX4Newbies]

At this point, I'd like to make this comment: YOUR BEST DEFENCE AGAINST LOSS IS NOT YOUR STOP LOSS, BUT A VERY SHARP AND ACCURATE TRADING METHOD.

Of course, nothing is guaranteed, but if you are being surprised by the market moves more often than not, something needs tweaking...


FX4Newbies

 

[FX4Newbies]

An additional comment on the current discussion:

Image by Pexels from Pixabay


It's a holiday week for the U.S. but this pic is intended to mean much more. If someone wanted to make this cake, they would need a list of the ingredients AND the method used to make it...and of course, any special tips and tricks to get it just right!

Sad to say, there are many traders out there with only half the recipe...and some, maybe not even that much. As the saying goes, "You don't know that you don't know...so how will you know what more you need to succeed?" That's one of the reasons it takes traders SOOO long to get to the place of trading profitably. Brokers are still reporting on average that 75%-80% of retail FX accounts are still losing. Why is that? And with all the free info online? How come? Could it be they have ingredients only and no method, or a partial method?

In trading, it is important to not just have knowledge but also UNDERSTANDING. With all your getting be sure to get a proper understanding. Learning does not always equate to having an understanding. Begin to examine what you have been using in your trading. Do you have the necessary ingredients? Do you have the proper method? Do you have sufficient skill and understanding to trade the method you would like to trade?

The next chart posts, I hope, will begin to be an eye-opener for you.


FX4Newbies

 

[FX4Newbies]

Continuing on...

Now many of us have been taught how to cross the street...Look left, look right, then look left again. In some countries, that could have been reversed...Look right, look left, then look right again. Somehow in trading we fixate on using one method... we don't look "right or left" to get a clear picture about everything that is happening before we "cross the street", i.e. place that trade. Here is an example of why many traders get stopped out.

The screenshot below was a trade posted in a forum showing analysis using the Andrews' Pitchfork. A great trading tool by the way! However, the result was that the trade was stopped out. Why? Well the price was doing something else, and the trader's chart did not have the necessary detail to understand all that was happening.

Next, let's go through three steps (using charts) to highlight a few things that could have helped this trader to see the possible buy opportunity.

NOTE: FOR EVERY STOP LOSS HIT, SOMEONE ELSE IS TAKING PROFIT!

 

[FX4Newbies]

CHART 1: With this pitchfork chart, a Sliding Parallel could have been used. A part of pitchfork analysis that would have made it more complete. Notice the black trendline that was added.

This is on a Daily Chart as I could not access H4 bars going back far enough...but it is close enough to make the point.

Now on to Chart #2.

 

[FX4Newbies]

CHART 2: Fibonacci Expansion Levels clearly showed price was at a retracement/reversal spot.

In my estimation and experience, using Fibonacci Tools in your trading is a MUST, not an option.

On to Chart #3.

 

[FX4Newbies]

CHART 3: The Stochastic Oscillator showed that the momentum was changing...see the blue line on the indicator.

Momentum indicators are POWERFUL, if you know how to use them. Not going to debate about indicators lagging the market. That's like saying yesterday's newspaper doesn't have valuable information for today. Yes, they do lag slightly but are still very valuable.

SUMMARY: The market will give clues as to what is coming. It is up to the trader to locate them, make sense of them, and trade accordingly. As Warren Buffet says, successful investing happens when you have the best information ahead of others and have the means and know how to take advantage of it early...a paraphrase.

Mr. Market was saying BUY, but the trader was probably thinking and seeing a sell. Learn to be objective, so you can extract from the market what it is telling you.

Managing risk starts with a proper method. More to come...

FX4Newbies

 

[FX4Newbies]

DECISIONS, DECISIONS, DECISIOINS... Making a decision to place a trade is the part of the process that results in trade execution. That decision making process can be hampered if too many facts and figures are being presented to the mind. That being the case, the trader has to choose the best quality of information for the mind to process...that means being very selective about the tools and techniques they are going to use in their trading method.

Of course, the extent and type of detail will depend on the precision of the trader...how tight or loose they want their system to be. I have seen traders who are okay with a trade going 200 and 300 pips in the red before it comes back into profit. They are comfortable with that...not my style.

To improve as a trader, find a method that provides the level of accuracy and precision you are looking for...and one that matches your trading plan: your time schedule etc. etc.

More to come... stay tuned.


FX4Newbies

 

[FX4Newbies]

So, here's a question for you:

Which buy entry was the best example of a low-risk entry? BUY#1? BUY #2? or BUY #3?

Feel free to state your reasons.


FX4Newbies

View attachment 338712

So, here's the answer... Buy #3. Why? That is where the price turned. It did not continue lower at that point. The other two buys moved up slightly, then dropped, as they were premature buy entries...and the market will give you lots of those. Unfortunately, many times, entering a trade at the point of a low-risk entry does not feel comfortable. That's why a different mindset and approach is needed.

Is your trading method sharp enough to spot them? If not, you might be experiencing losses because your stop loss orders are being hit.

Remember...you best defence against risk is a sharp trading method. And yes, they do exist.

That's it for now. Be back soon...


FX4Newbies

 

[FX4Newbies]

So... when you are getting into a trade, are you paying attention to your state of mind and your emotions?

Just before you click...

1. Are you entering the trade by following your trading method to the letter?

2. Are you entering impulsively hoping that you can grab a few pips?

3. Are you entering trying to recover previous losses: revenge trading?

4. Are you entering because of a hot tip from a trading buddy or some online service?

5. Are you entering out of boredom, because you have been waiting too long for a trade and your time is running out?

Be very clear as to your WHY for entering the trade. Any other reason other than #1 will often trigger an emotional state of mind as the price begins its "song and dance". Fear would likely begin to surface and would, with it, bring other negative emotions.

Learn to guard your emotional equity as much as your trading capital.


FX4Newbies

 

[FX4Newbies]

Okay...

Hopefully by now you have completed the Money Questionnaire (Post #6) and have drafted a Trading Plan (Post #7). Now let's talk a little about managing the capital in your account. We'll get into the trading methods later on...

It is advised by industry professionals that you should NOT risk more than 5% of your account on any one trade. A range generally seen is: 0.5% to 5%. So, what does that mean? Let's do the math...

Let's say your account balance is $500.
If you choose to risk 2% of that balance, then that dollar amount would be: 2% x $500 = .02 x 500 = $10.

That means that if your trade goes against your entry price, then the maximum amount of risk/loss your account should experience on that trade would be $10.

One of the ways you manage risk is by choosing the appropriate position size. There are many position size calculators online...CashBackForex has a great one!

Now if you place a trade of 1 Mini-Lot (0.1), on EurUsd for example, that $10 risk would be hit if your trade went 10 pips in the red ( 0.1 trade size x $10 per pip x 10 pips). If you traded with 1/2 Mini-Lot (0.05), then you can have the trade go 20 pips against the entry price and still risk only $10 in total ( 0.05 trade size x $10 per pip x 20 pips). Getting it?

But that's not all that you need to factor in. You also need to factor in where that stop loss would fall on the chart in light of Market Structure. Too many traders do a great job of calculating how much risk they should be willing to take, but not enough time is spent in determining where to place the stop loss on the chart. End result? Their stop loss ends up being hit because it was placed in the line of fire ...in the path of normal market volatility. Aim to NEVER have your stop loss hit in that manner. Might as well just write Mr. Market a cheque!

We'll pick this up again as we prepare to discuss trading methods as they are key to minimizing your risk.

Take care,


FX4Newbies

 

[FX4Newbies]

FOOD FOR THOUGHT!

Several years ago, I bought Jack Schwager's book, Market Wizards, where he interviewed top traders around the world. Interestingly, none of them to my recollection discussed their trading method, but they all talked about the mindset, attitude, planning your trading time etc. as being critical to their success.

If you look at most Forums, the most active threads are usually in the Technical Analysis Forum. Everybody is looking for the next method to make them millions, even billions, but fewer are working on themselves. As the saying goes, a tool is only as good as the person using it. Yes...get a solid method, and DOUBLE YESSSS....work on you!

Take care,


FX4Newbies