Most beginners in forex trading have the completely wrong mindset throughout the entire lifespan of a trade. From the beginning, middle and after the end of a trade, most people have their mind and focus on the wrong things.
As we move forward in the article, we will have a focus on how you should be thinking and what you should be doing before, during and after a trade. It will clear many concepts and help you in making financially feasible trading decisions.
Before entering a trade, a trader should keep in mind the following pointers.
- Calculate most logical stop loss placement – Don’t ever place your stop loss based on greed. Meaning, don’t place it too close to your entry just because you want to trade a bigger position size.
- Accept the potential for loss – You need to accept that anyone trade can lose mentally. No matter how good a trade setup looks or how confident you are, it can still end up being on the losing side. If you truly accept this fact you will not risk more than you’re comfortable with losing on any one trade and you won’t do things to try and ‘avoid’ a loss; like moving stops to breakeven too soon or perhaps even trading without a stop loss.
- Accept that the trade needs time to play out – As discussed above, ‘accept the loss’ mentally before you take it, then you won’t be trying to avoid it the whole time, and you won’t adjust your stop or otherwise interfere with your trade. Just accept that the market is going to fluctuate before it eventually hits your profit target if you have made all the right moves. If you try to react to every little fluctuation in the market, you will be a wreck and so will your trading account. You need to accept that your trade will need time to work itself out before you enter it, so be prepared to do nothing.
During a trade, a trader should keep in mind the following pointers.
- Let the market prove you wrong – Have a predefined level or spot on the chart that will show you your trade idea was wrong if price moves past it, then stick to that level (stop loss level). Your goal is to leave the trade alone and either the market proves your trade idea wrong or right.
- As mentioned above, there are going to recede and flows for, and against your trade, this is normal. But, if you sit there watching every little one, you’re probably going to react by closing the trade early or making some other stupid trading mistake. Once you’ve decided on a trade setup and got all the parameters set, you have to commit to letting it play out, and that means you have to ‘sit on your hands.’ The most important thing you can do once your trade is all set up is nothing.
- Checking in on your trades once or twice a day is normal, and you should make a trading routine. Remember though, most of the time you should do nothing. If you find that you constantly want to adjust profit targets, stop losses or close or add to positions, you are probably over-thinking it and becoming over-involved.
The first thing to do after a trade, win, lose or draw, is to relax for a while. Forget about the market for a while, take a break, be calm, have a refreshing drink, etc.
After your last trade ends, it can be very hard to get back to where you need to be mentally in order to wait for the next high-probability trade without over-trading. The problem of over-confidence after winning trades is a big problem for traders. A winning trade is almost worse than a losing trade due to the fact that it can make us over-confident and even ‘arrogant’ about our trading, which in turn causes us to enter low-quality trades soon after a winning trade.
After a losing a trade, it’s also very tempting to jump back into the market on a low-quality trade setup, or on no setup, because you feel the urge to ‘make back’ the money you just lost. This is wrong though, and it’s not proper trading psychology.
You have to really understand and accept that each trade is unique, and you can potentially lose on any one trade; and if you accept that beforehand as I discussed above, you won’t be surprised if the outcome of your last trade is a loss. It’s all about eliminating the feeling of being ‘surprised’ by a trades outcome, as it’s that feeling of surprise, either a bad or good surprise, that can make us emotional about the outcome of a trade.