I’m sure you know by now that one of the keys to successful trading is to cut your losses short, and to let your winners run.
But how many times have you done the opposite: let losses run, or cut winners short? Worse still, how many times have you done it with full knowledge that you are doing the wrong thing?
As traders, we can engage in self-sabotage. Of which prolonging our losses and closing our winners early are some of the most insidious forms.
So if we know this practice is so harmful, why do we keep doing it?
Let your edge play out
Instead of trusting in our edge, we try to make the current trade work. We’d rather be right this time than next time.
We make these sorts of errors time and time again for a very simple reason: we know we’ll win some trades, but not which trades. In the face of this uncertainty, we fall back on hope.
No matter who you are, what environment you trade in, or the kinds of information you have access to, you will sometimes lose. Your “edge” is your probability of success over a series of trades, and this will never be 100%.
And here’s the kicker: by interfering with your system in an attempt to turn the current trade into a winner, you just lost your edge. The trade you just closed early may have made your profit target for the year; the small loser you could easily have escaped from just cost you 3 months.
If it seems a harsh truth, that’s because it is. Only by trusting your edge to deliver over the long term will you get to see your system play out and reap the rewards. You designed it; now you have to believe in it.
No more “justifying”
We justify taking profits because we are scared of our winning trade turning into a loser (although we don’t admit that to ourselves, preferring to think we have seen something important in the charts, or heard some game changing news).
Or, we become hopeful that the market will turn around and go for us, lifting our losing trade from the doldrums. We become incapable of detaching ourselves from the present moment and seeing the bigger picture.
So instead of treating this one trade as a tiny percentage of your lifelong total as a trader, you invest all your energy into trying to make it work at all costs. This negative mindset means that any old excuse will do to break the system’s rules (just this once of course!).
Be at peace
Stop worrying. Stop caring if the trade wins or not.
A losing trade is not the end of the world, and it certainly shouldn’t affect your self worth. the market will do what it does, and you can’t control it. The best you can do is to control your reactions.
The time for caring whether the trade will work or not is when you develop your system. When you are trading, you should be happy, relaxed and simply focusing on executing your rules perfectly. Whether the trade wins or loses should not bother you much at all.
Now, a challenge.
Try doing this for the next five trades. You might just be surprised at how liberating this mentality can be.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.