So you’re on a losing streak and your capital is down by 50 percent from recent highs, you keep on punting away in the belief that you’re about to recover all your losses. You just know that if you can hit that big winner it will bring your account back up to where it was when you started. You are very excited about the prospect of making everything back you have lost recently and are looking forward to finally making some decent coin above and beyond your initial account deposit.
WARNING!!!! YOU NEED TO ENTER FOREX TRADERS REHAB.
While losing a few trades in a row does not necessarily mean you need professional help, it does mean you need to stop and pull yourself away from the market and objectively think about your trading decisions. Over trading and obsession with the market are two very real problems that many traders experience, with a little time and effort on your part you can easily over come these often made trading errors. This article will give you some good pointers in how to effectively pull yourself out of a rut of trading mistakes and help to push you on along the correct path. Combined with using price action strategies, a good mindset is crucial to trading success.
Rehabilitating traders 1 pip at a time
High my name is “insert your name here”, and I’m a trade-aholic, today my goal is to not make a trade. This cliché first born in alcoholics anonymous groups is just as relevant to alcoholism as it can be to trading. The fact is that over-trading is no different from alcoholism or any other form of addiction or lifestyle abuse. Many people become addicted to Forex trading and don’t even realize it, it is easy for forex trading, or any other form of trading to not seem like gambling because it doesn’t necessarily have the stigma attached to it as gambling does and is seen as a more acceptable profession than say, professional poker playing. However, once you start becoming preoccupied with your trading while you are away from your computer screen you have essentially entered the realm of gambling.
Problem gambling is any gambling behavior that disrupts your life. If you are losing money in the markets that you cannot afford to lose than you are at least hurting yourself and probably other people in your life as well. This is a really serious problem that needs to be fixed as soon as possible. It is just too easy to get sucked into the trap of believing you can make back the money you lost in the markets, only to continue losing it and continuing believing you can make it back. Just as the main theme of alcoholics anonymous is to quit drinking cold turkey, the only way to effectively eliminate your gambling habit in the markets is to stop trading with real money until you realize what you are doing.
Steps to recovery:
Admitting you have a problem with trading
Tell yourself each morning when you wake up that you are addicted to trading. You need to be consciously aware that you have developed a bad habit so that you can work on fixing it. The first step to solving your addiction to trading is to admit that you indeed do have a problem. Many people do not even make it to this first step because their ego is too big to even see the fact that they are over-trading and probably completely out of control. A classic hallmark of people with gambling addictions is not being able to control the impulse to gamble, even when they know their gambling is hurting themselves or their loved ones. The first step to being able to control your issues with over-trading and risking too much is to admit that you are an over-trader and also to admit that you are being careless with your money.
Work to retrain your brain
An essential component to effectively solving your trading addiction is to work on retraining your brain. The reason you are stuck in a cycle of destructive trading is because you have most likely reinforced bad trading habits by getting lucky on a few big trades. Once you hit a few big winners you have wired your brain to expect the same out come from similar behavior in the future. If this behavior was risking 20% of your account than you will probably continue to do that because you remember how good it felt when you risked 20% of your account last time and doubled your account value. You then continue to do this until you have lost all the money in your account; it is only a matter of time.
The first step towards effectively retraining your brain to eliminate bad trading habits is to quit trading with real money. If you still feel the urge to trade than you must force yourself to only demo trade until you can prove to yourself that you can control your behavior. For example, you could set a goal of 5 winning trades in a row in your demo account before moving back to a live account. Make sure you are only taking well defined price action setups in your demo account and concentrate on only risking a very small amount per trade, less than 3% of account value. The only way demo trading will help you retrain your brain is to treat it as if it is a real account. You need to just forget about the fact that it is not real money and treat it as if it is. Only after you have proved yourself on a demo account should you allow yourself to switch back to real money trading, this will work to build your confidence as a trader and as a person because you will have to prove that you can control your actions before rewarding yourself with a real money trade.
Increase the extracurricular activities in your life. One of the classic symptoms of compulsive gamblers is that they are so focused on their gambling activities they lose sight of other priorities in their life. Professional traders do not sit and watch their charts all day, they have gotten to the point of trading Forex full time because they know that spending obscene amounts of time in front of a trading screen is not the way to consistently make money. In fact, there is actually a negative correlation between time spent analyzing the markets and the amount of money you will make, in essence, the more time you spend thinking about, worrying about, or watching your charts the less money you will make overtime. Warren Buffet did not become the wealthiest trader in history from staring at charts all day. He essentially used the “set and forget” method of Forex trading; you find a high quality setup, enter your entry and exit parameters, and then let the market do the work.
One way to consciously reduce the time you spend trading is to focus on other activities, if you have a full time job than go to the gym after work instead of racing home to look at your charts. The charts will be there when you get home, no matter what, there are constantly opportunities forming in the markets. One big issue most traders deal with is worrying about missing trades; this is one of the silliest mistakes to make, but also one of the most common. You just have to accept the fact that the Forex market is constantly ebbing and flowing, you are going to miss many trades, that’s just the nature of the beast. If you go chasing every trade that you think “looks good”, you are going to blow out your account faster than you ever dreamed possible. Don’t worry about missing trades; trading should be done at a certain time each day, for no more than one hour or so. Set a certain time period each day that you will interact with the market, and then shut down your trading station for 24 hours. You are not going to improve your long term equity curve by messing around with stop losses or profit targets once you have entered a trade. All of your trading parameters need to be set before entering the trade; this is the time you will be thinking the most objectively and clearly. When you starting meddling with your trade after it is entered you are working off pure emotion and have cemented your name in the wall of trading addicts.
If you know that you are a trading addict than you need to schedule activities to fill the time that you normally spend over-analyzing the market. As previously stated you should join a gym or exercise some other way, exercise clears the mind and cleanses the body, it will lift your spirits and help you to think more objectively, any serious trader should have a regular exercise schedule to aid in overall trading performance.
Make the market work for you, not against you
One thing that everyone can agree upon is that the forex market exhibits extreme volatility at times and often develops some very strong trends within the various currency pairs. The way to make the market work for you and not against you is to harness the directional power of the Forex market by risking a very small amount of your account and letting the leverage grow your small seed into a huge ball of profit. The problem is that most people do the opposite; they start off risking a very large amount and the emotional mistakes that ensue as a result of risking too much end up turning a large sum of money into nothing, very quickly. The only way to feel in control of your trading activity is to begin by risking an amount that you sincerely do not mind losing. You should have no problem sleeping at night when you have a trade on, if you can’t sleep because you are lying in bed thinking about your trade than you have a problem, you are Forex trading addict, and the market is going to chew you up and spit you out faster than you believe. The market is uncontrollable, but you can harness the power of the leverage it provides by controlling your behavior by only taking A+ setups and consciously being aware of how much money you are risking per trade.