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Reactions During Our Trading

reactions during trading introTraders react differently while trading which is one of the main reasons their are losers and winners in the Forex market. There are three major reasons that lead to different reactions while trading;

1. Probable market setup; this is when the trader is looking forward to open a trading position or has seen a setup based on various strategies that could lead to profit. Reactions during this situation are caused by the following emotions;

  • There is the reluctance of opening a position even when the trading strategy has given a signal in the fear that the trade would turn out to be a loser.
  • On the other hand, there is the greed of opening the position before the strategy gives a signal in the hope of taking profit early.

2. Losing position; winners and losers in Forex trading exhibit completely different reactions to a losing trade. Both could have the very same position in the market, however, the winner could mange his position to a winner while a loser could end up with a big loss or completely damage the trading account. Some of the questions traders ask themselves when in a losing position include;

  • Should I accept my losses, close the trade and move on?
  • Should I wait for my stoploss to be hit?
  • Should I add to my losing position so as to recover my loss when the trade finally turns my way?
  • Should I hedge the position to prevent further loss?

3. Winning Position; Just like in the losing position; winning positions also bring out different reactions from traders. The questions that bring these reactions include;

  • Do I take my profit and run?
  • Do I wait for my takeprofit to be reached?
  • Should I trail or move my stoploss to breakeven?
  • Do I scale into my position?
  • Do I scale out of my position?

Having looked at the major situations that cause traders to have different reactions during trading; let us see the individual reactions caused by emotions from the three situations.

Greed; this causes traders to react in the following ways;

  • Jumping into positions too quickly before the setup has completely formed. Fast moving markets may entice the trader to jump in into the direction of the trade for instance during high impact news. Newbie traders also exhibit this reaction due to the excitement of taking part in the fast paced Forex market. This is catastrophic to their trading accounts and is sometimes compared to jumping into a moving car or catching a falling knife.
  • Not taking profit off the table in the hope of making more profit. Greedy traders fail to understand that there will always be another opportunity for profit given the 24/5 nature of the Forex market.
  • Use of large lot sizes or over-leveraging their positions when a setup comes around. Greedy traders dream of quick overnight riches from the Forex market forgetting the adage that ‘bears make money, bulls make money, and pigs get slaughtered’. Usually more often than not; the result of high leverage is blown trading accounts.

Fear; just like greed, fear will trigger various reactions during trading including;

  • Failure to open a trading position even when a trading setup has formed. This mostly happens to newbie traders as they are not used to market movements. It could also happen to a trader who has experienced a string of losses or one single huge loss and he/she is afraid of losing the trading account.
  • Taking profit too soon is also triggered by fear as the trader is afraid to lose what is already on the table.

Over Confidence; Over confident traders open trades before their trading setup has formed as they may be used to winning after a streak of good trades. They may also resort to over leveraging as they do not expect to encounter a loser.

Revenge and regret; some of the reactions these traders may show include; adding to losing trades in the hope of recovering their loss, opening numerous positions, martingale, and moving their stoploss away from their entry so as not to take a loss.

Remedies/Positive Actions to avoid the above reactions during trading;

  • Making a trading plan for trading days so as not to deviate from planned actions in the market.
  • Keeping a trading journal to help review and rectify negative reactions by knowing what market situations trigger them.
  • Use of low and acceptable leverage to avoid huge losses that may lead to revenge trading and regret.
  • Always using a stoploss at an acceptable loss limit.This will ensure the trader is ready to accept losses if the trade goes the other way. As it is said; it is always good to hope for the best but also prepare for the worst.
  • Checking the economic calendar for high impact news and prepare for huge unexpected market movements thereby avoiding panic.
  • Taking a break after a string of losses, this will also combat revenge trading.
  • Do not start trading immediately you open your charting platform. Traders should take sometime to adjust to a proper trading zone by reviewing the previous day, their journal and preparing a trading plan.

Conclusion;

Some reactions during trading are paramount to most traders’ losses and should be avoided by maintaining proper discipline. Successful traders have been able to control their reactions to various market events and so should newbie traders instead of putting all their efforts to mastering different trading strategies.

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