Trading is a game of emotion. A psychological battle wages inside the mind of traders worldwide and until this inner battle is won by the trader, losses would always be the order of the day.
As someone once said: ‘We have met the enemy and he is us’.
There are two primary emotions that must be overcome: Fear and Greed.
Fear exists in two forms:
1.) Fear of losing: Every trader when placing a trade is afraid that it may go wrong and the trader might end up booking a loss. It is this fear that prevents traders from placing stop loss orders. They do not ever want to have to take a loss. They hope that any trade going against them will eventually get better and they do not want to feel the pain of losing at all costs. Sadly, a lot of traders have wiped out their accounts as a direct result of avoiding to take small losses. Understanding that losing is part of trading and using stop losses where you do not risk more than 1-2% of your capital is a winning method.
2.) Fear of giving back profits: There is an old saying in trading which goes ‘ Cut your losses short and Let your profits run’. Most new traders tend to do the opposite. The let their losses run out of hand and take profits too soon. Traders are afraid that the immediate gains they have witnessed might be lost and quickly close out any little profit they see. The problem here is winning trades are not allowed to fully play out and as a result, when the losses do come, the trader is left with a net loss at the end of the day. Using take profits at defined price target levels in line with a winning strategy is the best way to manage this concern.
A good way to overcome these two fears is to do what’s called Scaling. Instead of entering a trade with just one click, break it down into smaller bits at roughly the same entry level.
For instance, instead of buying 10 lots of the EUR/USD at 1.3500; you can instead do 5 trades of 2 lots each at around 1.3500. That way you’ll have 5 trades instead of just one.
You can then exit the first 2 lots at say a 4 pip profit (At least you’ve taken care of the fear of losing).
Afterwards you can exit the next 4 lots at 10 pip profit and then raise your stop to your entry levels ( you’ve taken care of the fear of losing).
Then you can let the last 4 lots run up to the profit target ( here you’ve taken care of the fear of giving back profits).