People who trade the financial markets tend to be quite egotistical by nature. When considering a potential trade, there is little doubt in the traders mind that their analysis is incorrect. Having entered the trade, there is a moment of absolute certainty that the trade can only be successful. Indeed, even if the trade was to immediately fall into negative territory, an over-riding optimism exists that the market will imminently turn around, and that the trader’s opinion will be proven to be correct.
This fallacy comes from the trader feeling that they are correct and the market is incorrect. It can only be described as an irrational belief, as it is proven time and time again that it is the market which is always correct. The market is the ultimate indicator, the ultimate “right”. There is a very popular saying when it comes to trading the financial markets, and that is that the market can remain moving in an illogical fashion for a lot longer than any trader can stay solvent.
The very best process to take is to enter every trade with almost a pessimistic mind-set. There has absolutely never been an instance where a financial trader has been successful in every single trade. It needs to be both realised and accepted that the very best traders who have ever lived have been successful in less than 50% of the trades that they have ever placed. If this is the case, then how have they profited?
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Profits come from limiting your downside risk. Profits come from never limiting your upside rewards. This tends to be the opposite action of unsuccessful traders. When emotion enters the fray, profits tend to be booked early and losing trades are left to run. There is an overwhelming desire to never realise a loss.
A reward can never be possible without initial risk. It is the acceptance of this risk which is the first necessary step to take. Before taking a position, the trader needs to have a clear line in the sand. They need to have a stop loss in place which will see themselves automatically exit the market if this level is reached. This will ensure that your trading capital is protected at all times… and the importance of this cannot be stressed enough.
When you have taken the considered steps to protect your capital – that which you have worked hard to earn – then you will be in a position to fight another day. A complete and thorough risk management system is a key element to any successful trading strategy. A profitable trader will understand that they will never be right every single time. It is how you react when you experience a loss which will determine your overall success.
Source: Academy of Financial Trading