Forex Trading Articles

REMEMBERING THE OBVIOUS

Forexmentor Team
© 2007, Currex Investment Services Inc.

May 23, 2007

Traders are notorious for making the same mistakes over and over again. They abandon their risk limits. They sell earlier than their trading plan dictates, or hold on to losing trades too long. It's human to make mistakes, but long-term profitability in the challenging field of trading requires firm discipline, which is often hard to maintain. Humans are prone to hesitate and act on impulse. How can you fight impulses? One straightforward method is to develop simple plans and remind yourself as to why you need to follow them

There are times when we try to make things more complicated than they really are. Humans tend to over-think matters and look for complexity. We may wonder why we make common trading mistakes, and as we wonder, we may search for a "hidden" unconscious reason for it all. Perhaps we secretly feel we don't deserve the profits we make and want to give back what we've made to return everything to the status quo. Maybe we secretly see money as the root of all evil and have trouble accumulating wealth. If you do hold these beliefs, they can severely hamper your trading performance, but not all traders are influenced by such unconscious motives. Sometimes a lack of discipline just reflects a very human inability to make simple plans and follow them.

Psychologists have long noticed that people have trouble following simple plans. Whether it is managing their time, losing weight, or trying to stop smoking, people have difficulty controlling their behavior. One effective strategy is to take a few obvious steps: Make a simple plan, observe and write down the conditions that stop you from following your plan, and remind yourself of the benefits for following your plan. For example, if you have trouble maintaining your risk limits, it could be for simple reasons. You may be tired during the trading day and allow your objective state of mind to hesitate. Or you may get bored during the trading day and want to seek out a little excitement. Whatever it is, it is necessary to outline the specific conditions under which you do the undesired behavior that you are trying to change or control. Once you know these conditions, it will help you anticipate when you are prone to fall prey to them.

The next step is to write down why changing your behavior is important. For example, if you want to avoid risky trades, then you need to write down why it's important to avoid such trades. You might write down on a card, "I cannot afford to keep losing capital or else I will blow out my account." Once you write this fact down, you will have to repeat it to yourself over and over again. Will repetition of this fact guarantee that you will change? Unfortunately, no! But it will go a long way toward making you change. There's something about human nature that is hard to change, but if you repeat the reasons you need to change over and over again, it may stick with you.

Sometimes self-control is just a matter of willpower and reminding yourself you can maintain control if you try. It's like standing in line at the grocery store. If the line is long and there is only one checker available in the whole store that is impossibly slow, you may be tempted to leave, but if you decide that you want your groceries no matter how long it takes, you can convince yourself to wait patiently. You can repeat over and over again, "I'll eventually get out of here if I just wait my turn. I'm determined not to leave." Repeating this mantra over and over again will help you stay in the line. But if you think, "I don't have the time to wait. Maybe I can walk out the door and go to another store," leaving will start to seem like a good idea and you will do it. A similar strategy can be taken with trading. If you want to avoid selling a trade early, it is useful to repeat to yourself over and over again, "Stick with the trading plan. Don't sell until the price reaches my profit objective." Repetition is the key strategy. Repeat what you want to do and remind yourself over and over again why you want to do it. Focus only on the trade at hand, and repeat what you want to do over and over again. It may seem obvious, but it works.

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