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​Impact of Trading Psychology on Your Trade Management

February 26, 2017 07:00

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Dear Traders,

Have you ever experienced hesitation and difficulties with closing an open trade? It's a phenomenon that most Forex traders, even experienced ones, struggle to improve.

Trading psychology is a critical element of successful trading. Together with managing risk properly, they form the backbone of long-term consistency.

This article will explain why traders feel attached to their trade setup and how they can treat their trades more rationally.

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Why do traders focus on the wrong things?

Most traders only focus on trading strategies and finding trade entries. They are attracted by the allure of pips and profits and believe that trading systems and entries are sufficient to become profitable.

Unfortunately, I need to burst that bubble, or else the market will do it.

Please do not get me wrong—applying balanced strategies and finding quality entries is important work and deserves a trader's attention. Just not 100% of the attention. There are other vital aspects like risk management, trade management and trading psychology.

Unfortunately, many traders become fully distracted by only one side of the equation—systems and entries. They invest all of their time and energy in testing and optimising strategies rather than building up the experience needed to manage open trades and to handle the psychology behind each setup.

The second difficulty is simply that managing trades is tough from a trading psychology point of view.

When does trade management go wrong?

Unfortunately, a trader's trading psychology can obstruct and sabotage our clarity when taking trade management decisions.

Perhaps you have had some of those thoughts float in your mind when managing open trade setups:

  1. This setup will surely win.
  2. This setup can never lose.
  3. The market must rebound now.
  4. The market will surely hit this target.

Generally speaking, traders see their trades as "good" and the market as "bad". The trades are almost like their own kids.

Their losing trades are, in a way, their unrewarded heros. Their winning trades appear unbeatable. Their doubtful trades surely will recover soon...

These thoughts represent a trader's hope and wishes when trade setups are open. But here is the real secret of the market—it does not listen to to our hopes.

The market does not think, it is rather like the wind. It blows without thought but it does generally follow a larger pattern and trend (climate and weather movements).

My best advice is always this—let the markets speak and let us traders listen.

Most traders expect the market to follow their analysis, their plans and their ideas. No, it's the trader's task to follow the market as closely as possible (perfection is impossible).

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How do you balance emotions with open trades?

The first step is not to feel attached to any trade setup. My trade setups are not in a "battle" with the markets. Rather, they are testing my ideas about the market.

The market can prove my trade analysis correct or incorrect. I use the following steps to help guide me in this process:

  1. I use invalidation and confirmation levels to test whether the market agrees or disagrees with my analysis (not me as a trader).
  2. I also keep an eye on the emotions of the market by analysing patterns, candles, and waves.
  3. I update my analysis occasionally and regularly to check whether price action and the market structure have stayed the same or changed.

Set-and-forget traders can do well, but I personally prefer to use new price information for continuously updating the best trading decisions. Of course, I need to avoid re analysing open trades every single second of the hour. Mostly analysing the markets every few candles is fine (on the same time frame as the entry or higher).

Be aware that you can only be open to receive new information if you are able to manage your trading bias. If I were to (secretly) believe that one particular trade setup must be correct in all circumstances, then I will never be able to honestly analyse the best management for the trade. Why? Because then I would believe that the market has to prove me correct.

In my vision, traders must remove this bias. One simple practical method is to 'advise' yourself. Give trade management advice about an open setup but believe that the trade is not yours. This should help remove some of the emotional attachment.

Remember, my trade setups do not need to prove anything to me. They do not represent me or who I am as a trader. Therefore, I feel fully comfortable with managing the trade.

To sum up, all trade setups are merely ideas. The market can confirm or invalidate them, but don't take it personally. Rather, be mentally ready for all circumstances so that you can adjust your trading plan to the reality on the charts. And the only way to be mentally ready is to be open to analyse new information without a trading bias.

Cheers and safe trading,

Chris Svorcik

Senior Analyst

Admiral Markets

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