The Four Horsemen of Trading

September 13, 2017 15:59

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Dear traders,

You must have heard the term "Four Horsemen of the Apocalypse". In short, the Four Horsemen are symbolic descriptions of different events which will take place when the end of times is near. Fictionally, when they appear, they bring death, fear, and famine. Unfortunately, the Four Horsemen of Trading are also very real:

  1. Hope
  2. Regret
  3. Fear
  4. Greed

Hope

Hope can be dangerous to Forex and CFD traders. Sometimes, it's hard to understand that hope is not good for traders simply because we've been said that it's a very good thing we should all cling to it.

What is "hope"? Essentially, an expectation that something will happen, or a strong desire for it to happen. When traders trade with hope, they often "hope themselves" right of making a return on their investment. It can easily cause traders to move their stop-losses further away or, what is the worst, delete them altogether. Hope traders usually do it because they think the market will turn around in their favour, allowing them to avoid the losing trade.

Usually, it never happens. What happens is that a trader takes either a very small profit or suffers a huge loss because the fear of losing is stronger than the hope of winning. This effectively proves that hope works in tandem with fear, another Horseman of Trading Apocalypse.


Hoping that every trade you take will be a winner is at least foolish. If you hope for a winning trade, you might be also expecting a favourable outcome, and this could set you up for a whole lot of emotional trading errors because when you expect something to happen and it doesn't, it brings about negative emotions. You feel sad, depressed, angry, or regretful.

Simply try to be realistic, meaning that you have an effective trading strategy that doesn't mean every trade will be a winner. We always have a mixture of winners and losers, especially, if we trade intraday. Over time, if you manage your money properly and do not over-trade, you will see that the edge your trading strategy gives you actually pays off.

Regret

Regret is one of the feelings that traders might experience after a losing trade or a missed trading opportunity. It also happens when they don't make as much money as they hoped they would on a trade. We can assume that possibly happens because of greed and fear, which work in synergy with regret. Regret is a creeping doom, it slowly destroys your account.


As a trader, you need to realise that no two moments in the market are exactly the same; it's mostly a waste of time to stew over lost trades or that you didn't make as much money as you could have. The past can't be changed, and all you can do is evaluate what happened, try to take a little something away from it, and move on. The now-moment is far more important than the past because the market is constantly changing. Mr Market doesn't care about how much you made or lost on your last trade.


As a result, regret makes you chase trades by jumping in the market after a setup has already been triggered. This produces far worse risk reward potential on the trade, and it becomes much harder to turn a profit on the trade. As I always say: Patience is the key to successful trading. Chasing trades is not how a skilled and patient trader behaves.

Chasing trade setups after they had already happened is a slippery slope. It leads to forgetting about your trading plan and kicking off the process of trading randomly or gambling in the market.

Fear

This is how a famous stock trader Jesse Livermore described hope and fear.

"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day—and you lose more than you should had you not listened to hope….

"And when the market goes your way you become fearful that the next day will take away your profit, and you get out—too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses."

Fear is a defensive mechanism triggered when our mind gets a sudden realisation of an impending danger. But that can also be a trap. Humans are unique in the animal kingdom in many ways, one of those being that we are able to fear even when nothing is threatening us – just by thinking!

Out of fear of losing money, the majority of traders will avoid buying if the price drops low or selling on rallies. They just go with the flow, buying resistance and support. But it's not how money is made. In uptrend, we should buy when the price is oversold. In downtrend, conversely, we sell when the price is overbought. Fearing to miss the opportunity, traders do the contrary. They buy when the price is up and sell when the markets are down.

Out of fear of keeping their money safe, traders close their positions with 5-10 pips even when trading on H1 time frames.

Greed

Most traders start to feel confident after weeks or months of successful trading. But after some time, greed creeps in and usually what happens is that traders start to increase their positions. Why? Well, they want greater profits. In order to gain more profit, they start taking more risks.

In my opinion, this could be a very fast lane to deleting your account. The vast majority of traders tend to increase their position sizes at a disproportionate manner. Usually, they do it with sizes that are much larger than the profit they made on their accounts. As greed creeps in and money management rules are forgotten, liquidating the account can happen in a few bad trades. Spiral of doom is inevitable.

The video from my seminar in Frankfurt will give you even more insight into the creeping doom of the Four Horsemen.

How to Stay Away from the Four Horsemen

  1. Start your trading day being optimistic, not euphoric.
  2. Hope not for your trade, use a stop-loss.
  3. If you want to hope, then hope for a profitable trading year.
  4. Follow your strategy and implement consistent discipline in your money management.
  5. Don't pursue the Holy Grail, the Holy Grail is proper money/risk management.
  6. Every trade cannot be a winner, it's not realistic.
  7. Instead of being regretful over missing a trade setup, remain calm and observe the market.
  8. Be patient, keep your hands in the pockets until the next trade comes along.

I hope that you have enjoyed the article. If you have anything to ask, feel free to do it in the comment sections below.

Cheers and safe trading,

Nenad