If something looks too good to be true, maybe it is. Well, not at the high point of success, but it can turn to a slippery road downhill. The riches to rags story is all too common.
Euphoria to an exhausted account
It doesn’t have to begin with overconfidence. You take a forex course and complete it successfully. You then open a demo account and get the feel for trading. The next step is opening a real account.
Perhaps nervous and cautious at first, you strictly follow a strategy and place a trade. Everything works to plan and you take your profit. A second trade is also executed to perfection and you are satisfied.
After a few winning trades, you move up to double the size of your trade, winning an even larger profit. You worked hard to master the technique and you are harvesting the fruits. Great!
Satisfaction turns into confidence and you begin feeling unstoppable and then invincible. It becomes too easy and you begin thinking about how to spend the money.
The path of success continues and so do your positions. And then, one trade goes in the opposite direction and hits your stop-loss point only to reverse course and end up winning. Your conclusion is: I need wider stop-loss points and I can surely afford it.
Without changing position sizes you enter another trade, perhaps soon after, without calculating it quietly. It ends with a loss. You become angry and want to take revenge on the market, gaining back what you lost in an even bigger position sizes.
As the situation worsens you cannot calm down and the end is clear: the account is liquidated. It happened to me. Did it happen to you?
Avoiding the euphoric scenario
- Take a break: This advice is relevant after enjoying a successful trade and also after suffering a loss. Jumping into a new trade without a pause can result in a not-so-calculated trade that can end badly.
- Maintain your position sizes: A bigger position size can lose more money as easily as it can win more money. Having a bigger account doesn’t mean you should risk more. And if you do move forward to work with larger position sizes, take your time before doing so and choose a period of lower volatility to do so.
- Withdraw: Did you make some money? Move it out of your trading account. It doesn’t have to happen after every winning trade, but don’t leave too much money in your account without enjoying it. Having fewer funds deposited will also help you maintain the position sizes.
- Enjoy your wins: If you withdrew money, you can enjoy it. Go buy that thing you had in the back of your mind. Drooling on your wins is a distraction from healthy trading and contributes to over-confidence. Spending the money is the necessary break mentioned beforehand.
- Analyze all trades: Yes, also the winning ones. Many traders tend to torture themselves about losing trades and move on after a winning one. Once again, analyzing every trade will help in taking a break, but more importantly, will provide you with valuable information. Why did you win the trade? Was it a perfect execution of your plan? Great! Cautious confidence is warranted. Was it sheer luck? We all need some luck, but luck isn’t a strategy and you can improve in your next trade.
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