"...To make great sums of money you first have to learn how to lose much smaller sums of it when you're wrong."
-Paul Tudor Jones, Chairman and CEO of Tudor Investment Corp.
Trading the FX market holds so much promise for new traders. However, our mental psyche isn't really built to trade a market that doesn't stop by default. This article will help you understand what one trait all upper echelon traders agree on for long-term success and how you can apply this to your trading.
The Common Start To All Traders Great & Not-So-Great Alike
The easy place for trader's to begin their trading career is to search high and low for the best indicator on the street. But if you step back and think about it, that's not the way to grow your account over the long term. Unfortunately, you really have to think about it and sadly many traders have not which causes them to fall into the masses that lose instead of the few who win.
For more on the previous paragraph, consider these words from fames speculator of the early 20th century, Jesse Livermore. "All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis." Unfortunately, the first route that proves full of perilous of many traders is trying to figure out where to buy without looking to the point where your edge begins to dissipate much like a casino does so that you don't find yourself at a larger disadvantage for staying in the trade than simply exiting with a small loss.
The Next Appropriate Route For Trading Success
The opening quote from Paul Tudor Jones is one of my favorite because it shows that the bull market in books on a trading system with 90% win rates are meeting their due demise. The reason the demise of most trading books that promise eternal riches with a simple moving average cross-over often disapoint is because many traders haven't developed the absolutely crucial discipline on managing your account capital and profits by quickly exiting a trade that begins to go against your trading rules.
You've likely heard the saying of the contrarian that to find out how to be successful in any endeavor, you should simple see what the masses are doing and reverse that process. To apply that to trading, you should start with thinking about when you will exit a trade as opposed to when you should exit a trade. I've talked to thousands of traders over the years and a large majority of them seek an entry signal while figuring that they'll, 'just know' when is the right time to exit the trade but without a plan they're likely to repeat the failure of many by holding onto a losing trade until they're forced out.
Simple Tips To Exiting A Trade
There are a few good ways I know of to help you decide to exit a trade:
-Regardless of the underlying conditions like you're indicators for getting into the trade, exit when a loss of 2-5% of total account equity is lost on a trade.
-If you're holding a losing trade, think from ground zero by asking yourself, "If I wasn't already in this trade, would I enter again in the same direction that I'm currently trading?" If the answer is no, get out immediately and wait for clarity.
-Look for opposing price action signals. The most popular way of viewing price action is through Japanese Candlestick Charting which shows many 1,2, & 3-candle reversal patterns or signs of exhaustion within a trend. If one of these signals develops against your trade, exit immediately. It is much cheaper to re-enter the trade if your idea doesn't pay-off than to see your equity evaporate because you didn't want to take the loss a week ago which now unbearable.
What Not To Do When In A Losing Trade
-Ask other people (like your broker) if they're staying in the trade. Is this known as following the crowd, which is a fool's game.
-Add to your losing trade. This is known as averaging down but it should be avoided because you don't want to add to a losing trade that could be going against you for reason beyond your understanding.
-Tune out the market. It can be a harmful thing to not look at the market when a trade is going against. While that may feel comfortable, if things start to get ugly quick, you can't get out fast enough.
Stay on the look out for these common mental traps and you'll be above the majority and hopefully on your way to a successful trading career.
Happy Trading!
Subject: The One Thing All Professional Traders Agree On 
Thu Nov 19, 2015 7:04 am
