It’s Not Logical It’s Psychological

It’s Not Logical It’s Psychological

As we soon start 2020 we at Forex Trading Academy could not be more excited about the prospects for FX trading and one-on-one live mentorship this year. While equity markets could take a nose dive as the reality of the Fed’s impulse to print more cash out of thin air, thereby prepping up stock markets artificially, finally catches up with the US economy. If this happens the currency markets are primed for more volatility and we intend to take full advantage of all the opportunities that come our way.

As the year begins it seems a good time to revisit the key rule of speculation, namely that at its core, trading is not logical but psychological. Once you understand that dynamic you can understand why tulips were once worth their weight in gold, why Pets.com attracted billions of dollars of investors’ money and why a trailer home in California was once listed for more than a million dollars.

Psychology plays an important role not only in valuation but in trading tactics as well. As traders we are commanded to cut our losses short and let our profits run. Yet in real life this is the equivalent of being told to run and stand still at the same time.  The natural tension that is created by this rule generates much unneeded angst and at first glance nearly impossible to do. The reason is something called retrace risk: prices go up and/or down, then retracing and continue that way, going into a zigzag mode for some time. This makes it very difficult to stay in a trade and bank profits because trades always go back up on you.

If you trade daily charts and you set certain profit targets price may not go there and may reverse with a vengeance before it hits your target, taking your net positive profits and finally also your stops out. This may turn out into a very expensive trade. Most traders are not able to absorb these kinds of losses continuously and stay in the game.

There is a way to counter this conflict though: one can create an exit strategy allowing us to truly control our risk and capture much more of the return. One of the ways it could be done is by using a 2 lot method whereby the 1st target could be your 10-50 pips profit depending on the timeframe you are using, thereby taking some psychological pressure of you. Afterwards we are going to put our stop on breakeven and then hope we will get a 3/10 chance of a continuation and get an opportunity to let our profits run.

Although not mathematically optimal a 2 lot method is psychologically a sound way of trading as it frees you from unnecessary stress and disturbing emotions only leading to more frustration and misery on your trading account. We all know what happens next when emotions take over…

Rudy – Professional Forex Trading Mentor

https://www.forextradingacademy.co.za/
info@forextradingacademy.co.za

+27 82 926 6855

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