Check out Part 1 Here and Part 2 Here.
Lack of Courage to Take a Loss
There is nothing macho or gutsy about riding a loss, just stupidity and cowardice. It takes guts and intelligence to accept your loss and wait for the right opportunity to try again. It also takes practice. That's right, practice taking your losses. With time it gets easier.
I know that financial loss is one of the scariest things for humans to accept but at some point if you are going to succeed as a trader you need to make the decision that you will define your maximum loss per trade. If price gets to your max loss point then you need to start learning what it feels like to take that loss and preserve your precious trading capital. Over time the pain will lessen and it will become automatic.
I know the above seems hard for some to digest but think about this for a moment. Back in the day when I was prop trading it was pretty common for me to trade 2-5 millions shares per day, in and out, foaming at the mouth high frequency manual trading all day long. I literally took hundreds of losses per day! The major thing that made it work for me was refusing to take a larger loss than my plan allowed. Learn to take your losses intelligently!
Rationalizing
This is an absolute Killer of traders and complimentary to the above point.
Put your trade on and let it run. If it hits your reasonable pre-determined stop then your trade is over. If you have to walk away from the computer and compose yourself then do it but don't for a second remove your stop and start rationalizing that the market will come back for any reason whatsoever.
If we use the analogy of thinking of your trading self as a fighter. Your stop loss just got knocked out. Moving your stop to make it larger is like getting up after being crushed with a knockout blow and trying to fight some more. It’s pointless and things will only get worse. Come back the next day and try again. A small loss will not ruin you but a catastrophic loss will both emotionally and financially.
Mixing Apples with Oranges
Have you ever done this? You see the EURUSD start aggressively trading higher so you go an buy another USD pair such as GBPUSD because it hasn't moved yet thinking that the US dollar is going to be weak across the board. This is a mistake. The reason the GBPUSD hasn’t moved yet is likely because of something external such as early morning economic news that was bearish.
Also, think about the implications of EUR going up. This means that it will actually be putting upside pressure on ERUGBP which could have a weakening effect on GBP on other pairs because the EURGBP is a major currency pair (in my opinion at least).
Don’t mix apples and oranges, if EURUSD looks like it’s being bid up aggressively then look for an intelligent spot buy EURUSD. Make sure to confirm with the news feed that there is a good sentiment or fundamental reason for the move as this is what will sustain the aggressive buying and give you conviction to hold for better profits.
Part 4 to follow shortly!
