Saturday, April 25, 2015

Why You Lost Money

Why You Lost Money #1:
You risked too much on one or more trades.
You probably started trading currency for the same reason I did: to make money. While that’s a worthy goal, and one that you’re likely to reach, it’s just not wise to try and make a year’s worth of profits in one trade.
Most of us, at one time or another, have risked 50% or more of our account on one or more trades. Most of us try that on our demo accounts, and then we start to feel invincible (look! See what I can do! I can double my money in just a week!). Of course, this led you to try something similar in your live account. That was a bad idea (but you already know that now).
Solution: Never risk more than 1% of your account on a single trade. Preferably less. Yes, you read that correctly. When you are just learning how to do this, you want to risk very little on each trade. The time will come for you to risk a
greater percentage on each trade. That time is not now.
This is a money-management solution. If you don’t put a lot of money on the roulette table, you can have a lot of your money taken off the roulette table. I guess that’s a bad analogy, however. You should never play roulette, anyway. It’s a game meant to always take away from you, no matter how good you think you are.
Why You Lost Money #2:
You set a lame stop loss, or none at all.
Setting a stop loss is like zipping up your pants in the morning. It’s not required, but you can feel really embarrassed, really quickly, if you don’t do it. To tell you the truth, you could conceivably set a stop loss 100 pips wide just to get 10 pips. If you are not risking more than 1% of your account on the trade, it doesn’t much matter. I have done this before. I don’t do it any longer, because that is a dumb risk:reward ratio. The point here is that you must set some type of stop loss so that if the market really gets wild, that you don’t get crushed.
Why You Lost Money #3:
You traded on emotion, not reality.
You and I sometimes get a good string of trades put together, and then we start walking around like we’re the Warren Buffet of forex (we’re not). A good thing to remember at a time like that is this: you are not the Warren Buffet of trading – and
the longer you keep up that attitude, you’re more likely to end up looking like the ENRON of forex. Bring yourself back down to earth before every trade. Make sure you take your time before every trade. Make sure that if you’re making what you believe to be a “sure bet,” then you better not risk more than 1% of your capital and set appropriate stop loss orders. Especially at the beginning of your trading career. You can start to risk more when you learn more. When you have a track record.
Why You Lost Money #4:
You just started trading with real money.
Your first trades with real money are the most amazing opportunities to lose money. You and I both did it – one week after I opened my first live account, I lost 90% of my account. I felt like crawling under a rock. Or smashing my head with one. It’s like magic: open a live account, lose money.
Realize that no matter how good you were on a demo account, you’re going to trade on emotion as soon as you open a live account. Mostly, you’re going to feel afraid to follow the same hair-brained strategy that you used when you were on the demo account. Here are five ideas that will help you avoid this:
1. Open your next live account with $2,000 or less. Trade for less than $1 per pip.
2. If you built a strategy / system while on a demo account, use it! It worked then, right?
3. If you didn’t build a system already, use that new small account to build one.
4. Don’t be afraid of losing money. Be afraid of making stupid trades.
5. NEVER, EVER, EVER, EVER trade when you’re emotional.

Why You Lost Money #5:
Something weird happened.
Well, it’s true: sometimes the market does things that it’s not supposed to do. Take Japanese intervention in the Yen – it’s not supposed to happen in a perfect world, but it does, and it can really throw off your perfect short trade. Or your forex dealer, like Refco, declares bankruptcy. These are the unpreventables, as I call them, and they don’t happen as often as we suspect. When you get burned by a totally unpredictable movement in the market, just sit back, relax, and ask yourself: did you only risk a small amount of your capital? Did you have a stop loss? If you had a stop loss and you only risked a small portion of your account, you will be just fine.
Why It’s Going to Be OK #1:
You’re going to learn why you lost money. If you lost more than 10% of your account on one trade, then you did something wrong. You goofed. It’s okay, just don’t do it again. Take a day off from trading. Step back.
Write down why you entered the trade.
Write down why you exited the trade.
Write down what you should have done differently.
NOT studying your worst moments is like smashing your thumb with a finger, and then smashing it again. And again. I have worked with traders who have been making the same mistakes for more than a year – have blown more than one account – and then when they spend a week studying the reasons for their trades, they become profitable traders.
Why It’s Going to Be OK #2:
Why did you enter the trade?
Did you enter the trade on a spur of the moment, emotional feeling? Write everything down. If you feel like you did everything right, that you entered the trade for all the right reasons, then maybe you didn’t stay in the trade long enough. If you have NO IDEA what happened, maybe you should write me – or someone who has been trading longer than you have. Ask them to look at the charts. Ask them what you could have done differently.
You should get in the habit of keeping a trade journal. The journal should include the following information:
Time of entry and type of trade (Buy, Sell, Pair, Lot size). Stop loss and limit orders.
Why you entered the trade. For example: “5 EMA crossed below the 30.”
Why It’s Going to Be OK #3:
Why did you exit the trade?
Many traders who give a reason for a trade entry don’t give a reason for the exit. The best reason to exit the trade is that it’s profitable and you want the money in your account. The worst reason to exit a trade is because it’s going against you and you don’t know what else to do.
You have to have a plan for the trades that go against you! Before you start trading as a career, or with any substantial money, you should make a plan for what you’re going to do if a trade goes south. Some questions you need to answer:
How far am I willing for this trade to go against me? Sometimes

traders set a stop loss that’s too wide or not wide enough, and then they disregard it anyway.
What are the criteria for realizing that the trade was not a good idea? Here, it’s not enough to say, “I’m losing money.” I mean, if you enter trades on an oscillator or indicator, do you exit based on those tools as well? What signals are given for a trade exit?
And last of all, you want to ask yourself: under what circumstances will you raise or lower your stop loss and your limit orders? The answer here should be that you will never adjust your stop unless you have put it so far away that you are risking more than a small fraction of your account.
Why It’s Going to Be OK #4:
What would you do differently next time?
I once got a bad haircut: at the end, nearly all of my hair was gone. I vowed to never let that happen again. Talk about (with a friend who trades) or write down what you would have done differently. Would you have avoided entering the trade altogether? Would you have waited longer – for example, if the position eventually turned profitable, you have learned that
sometimes the only thing separating you from profits is time. Would you have double-checked the indicators? Would you have looked closer at candlestick patterns? Asked an expert?
Once you decide what you would have done differently, then find someone who can help you keep your goal to act differently next time. Find a fellow trader who will double-check your trades. Set goals and get someone to help you keep them. Trading requires discipline and you can increase your discipline by working together with someone.
Why It’s Going to Be OK #5:
Get revenge.
Now create a list of goals for your forex trading – make the list as short as possible, but you should probably include as one of your goals “Never make the same mistake I just made ever again.” Once you’ve written your goals, you should also consider making a complete trading plan. That plan would include rules that you follow on getting in and out of trades,
indicators that you watch, and maximum losses that you are willing to withstand before exiting a trade. It would also include a method for follow up (including your trading journal).
Now, take those goals. And implement them. Get mad about your loss. I hate losing money. Hate it as much as anything else. Do you? If so, channel that anger and become more disciplined. Channel it and develop new goals. Channel it and commit to change your trading habits so that you can make money. Don’t be afraid to get revenge. But, as a good leader in battle, plan for it. Study it out. And then attack.

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