Wednesday, March 28, 2012
Unable to hold, exiting early III - Recent losses
One of the most difficult tasks a trader faces is to not let recent outcomes impact their current decisions. For example, a trader who may have sold b3 and bought b5 and lost both trades may have also entered a short below b8. However, instead of letting it run, he may be tempted to take a quick profit and exit his position completely. This is mainly because the two very recent losses have impacted his emotions and judgements pretty intensely even though he may not realize it consciously. The human survival mechanism kicks in and forces the trader to get out at a small, certain profit and be closer to flat for the day rather than risk making the loss larger.
It is very hard to overcome this emotional impact and start with a clean slate so to speak since there is insufficient time for the trader to calm down and regain composure. The way I address this is to avoid trading for at least two swings or wait for the price to move away from the area where you had your loss.
Not trading for a couple of swings protects you from going into tilt mode. Not trading around the same price protects you from choppy action. If you took a decent looking signal and were stopped out, there is a very good chance you are in some choppy waters and should expect to be stopped out again. Letting the price move away allows some time to pass and is likely to give you a better setup for the next trade.