Below is a post from a fellow trader at the forum.I find it will be very important to every body to read it over and over again, since there is a huge truth behind it and maybe you just dont want to admit it when you facing it on your daily trade.I hope this post will clear up one two thing for you ( and me ).The credit goes to the_wizard of forex factory forum.Ok enjoy then.
------------------------------------------------------------------------------------------------- Hi everyone,
I would like to comment on becoming a winning trader by cutting losses and letting profits ride because I strongly believe that it is one of the hardest things for a trader to actually do but one of the most vital in becoming successful.
I think it is particulary relevant to people in this thread that are just starting out because James tells us to trade only off daily and weekly bars while we are learning and he also says that once we master that we will most likely neither want or need to use lower time frames.
The problem with this however is that the really good setups do not come along that regularly and when they do, they often require a large stop. As a result, to be consistently profitable over time it is vital that trades are allowed to develop but that losses are cut short.
I originally wrote this in response to a post on FF in which a trader, who wanted to make a living off of just daily bars, said that he had had approximately thirty wins and only ten losses but had wiped out his whole account. It turns out that just three of these trades swallowed all his money because he kept thinking they would turn around.
This trader went on to say that when he had had winners, his reaction was always the same - he would see his position positive and immediately close and take the profit – only to usually end up seeing the market continue in the way he had originally thought it would.
Since letting trades run is a topic Seeking has already covered, I thought it might help people if I posted it here too. I've tried to add some new things, including charts to illustrate my points.
My answer to the trader is as follows:
If you are in a situation where the position you have taken is significantly in profit, take a minute to sit quietly and think rationally. You need to focus on the fundamental thing that your position is now telling you.
You have called the market and you are RIGHT.
We know by its very nature that the market goes up and down so when we are losing we hope at some point it will come back and if we are winning we worry that it may turn and that we may give some, or worse, ALL of our profits back.
I quote from memory of another’s work (I forget the source) when I say that we are "taught" from an early age that:
a) If we lose something it will eventually come back (e.g. If you lose your car keys, not to worry, they WILL eventually turn up)
b) If you see something, take it or you might lose the chance (e.g. If you see money lying in the street, pick it up quickly because it may not be there for long)
This translates into our trading. If our position goes against us, we tell ourselves not to worry because nothing goes one way for ever and it must surely come back. If we are winning, we want to get out quickly because if we come back later, all our profit may all be gone.
The reason it is so hard to overcome this is because it has been "programmed" into us. To be a good trader, requires going against what we have had ingrained from an early age. To put it simply, it requires going against human nature - what our heads and our hearts tell us.
It's been repeated so often it’s boring. And yet all traders that don't make it into the elite 5% suffer a manifestation of the same problem. They are either not cutting losses early or not letting their profits run.
Have you ever wondered why the market always reverses after you get out? Late last year I went long the GBP at around 1.90 targeting a move to $2.
At the time the pound had made an attempt on 1.91 several times and then come off - it was like a barrier and I felt certain that once it was broken it would go straight up to $2. This time I was convinced it would give way under the pressure of constant testing.
However, once I was long, the market began to fall. And I held and I held. Every day that it fell, I moved my stop further back, convinced that it would soon turn.
When it got down to around 1.85, I closed out. Not because I thought it would go any lower but simply because I could no longer take the pain of losing. And what happened? The market turned at almost exactly that point and only a few weeks later it was trading at 1.98 - a full 800 pips up on my original entry. (see GBP/USD chart)
Now whether I am right or wrong I will tell you how I see this in my head. I see it as the market having to turn because all the amateurs like me have held their position for so long, past so many logical places to get out that finally the pain is FORCING them to bail out. And once the weak having been shaken from the tree, the market is ready to move up again. As I said, this may be wrong, but this is how I like to view it.
So how do you overcome this?
Pick a point before you place a trade that, if the market hits, proves you are WRONG in your analysis. If you see, for example, a double top, and want to go short, place your stop a little way above the double top.
I have done this before, shorted at what I consider a top, only to see the market move up through it. Rather than close, I would then move my stop further and further away with the reasoning, this climb cannot go on, its got to fall...it's just a market fake out...it will come down.
But here is the point: Who cares if it comes down an hour later? Or the next day? Your reasoning is that the double top is the turning point. If the market trades through it, you are WRONG. This is NOT the top.
What if it was only a fake out and the market then plummets? You likely end up frustrated. What if it wasn't and you keep moving your stop back? Well that's a quick way to the poorhouse. And I know which of these outcomes I think is worse.
Remember, the market has a way of frustrating every trader but the greatest traders are flexible. If you are wrong in the short term, close your position and wait on the sidelines where you can see clearly and wait for the market to move in the direction you thought it would.
Timing is everything when you are trying to make a living do this. If your timing is wrong, then get out. Sometimes the market may give you another chance but you can bet the time you need it to most, is the time you will get dragged out.
This may make you laugh but it took me, personally, just over two years to realise this simple truth: You have no control over the market. You cannot influence where it goes. The market doesn't know who you are; it doesn't care who you are, what you have or what you could lose. It goes where it goes and you either ride it or you get carried out.
So, that's how you should cut losses. How about letting profits run?
For me, a key thing to remember is NOT to look for reasons to exit a trade once it is going well.
I did this a few months back with the GBP/JPY. The trend overall was firmly up but it had suffered a rather sharp pullback over a few days. Then it had bounced at an EMA that I use and began making its way back up. So I got in based on this DAILY bar and near the end of the day it was up just over 100 points. Now I became enamoured with this 100 point gain. I had a considerable amount of money on the table and as such I started seeing reasons to exit.
Suffice to say, I found what I thought was a good one - the stochastic was overbought on the HOURLY - it was running along steadily just above the overbought line. So, out I came. Then, in the Asian session, the price steadied and while it did this the stochastic came slowly down to oversold and then began to turn up, even though the price has suffered almost no pull back.
The next morning the market was up strong again and just a few days later it was up 1,000 ticks on my original entry. (see GBP/JPY chart)
For me, the emotional pain I felt at being in it, then exiting and missing the massive move, was the same as, if not worse to just having LOST in the first place.
I spent five months trading from home and gradually lost all my money. Looking back, that one trade could have been the difference between me being still at home trading for a living and where I am now - which is back in the daily 9-5 in an office doing a job I hate.
So, of utmost importance - remember why you entered the trade in the first place. With price action you can do this by STICKING TO YOUR TIMEFRAME. If you took a pin on the daily, do not get shaken out by a pin in the opposite direction on the hourly.
Sometimes you learn something when you least expect it. I actually had an epiphany of sorts when my girlfriend who knows absolutely nothing about the markets at all said to me: "Everyone has different reasons for doing things - they all play the game a different way."
This is the reason why the market goes up and down. Everyone is buying and selling based on different thought processes. Different strategies. Different methodologies.
But your reason is based on YOUR methodology so forget the other players. Let the market guide you.
In my opinion, a 20 tick pullback in a 100 tick move up is not a sign that the move is reversing. It is natural and it is inevitable. Consider the other market participants. In the short term they may want to scalp a small move or they may be hedging and therefore taking a position for another reason UNRELATED to profiting. These buyers and sellers will cause temporary fluctuations in price but actually exiting a good trade should be done when YOUR reason for entering is WRONG not just because it is suffering a temporary setback.
Let's look at price action since that is what James teaches.
If I enter on the break of a daily pin bar, (with a stop loss of say 100) I EXIT either when:
a) The daily bar gives me a sign the move is over and that signal is then CONFIRMED e.g. Signal may be another pin that appears, confirmation would be the break of it
b) My original stop is hit.
If I get in a trade and the market is up 300 ticks on the first day, I still have my stop loss where I could lose 100 if I get hit when the new session starts.
Each day I will trail my stop depending on the price action of the previous session. If you are long and in profit and then a bullish outside bar develops, then place your stop just underneath that bar because a reversal back underneath it means the trend is not as strong at the moment as you had thought.
But always try and remember – simply being UP is not a consideration for getting OUT.
Some people take these signals and close on the FIRST DAY because they have made a killing. Just think for a second - You are trading off a daily bar. You've had just ONE go in your favour. Try this. Look at a massive trend that you would like to have caught. (I've attached one for you - see the Dow chart) Look at a possible entry such as the double bottom, or any of the many swing lows. Then count how many daily bars made up the rest of the move, from bottom to top. Now consider exiting on the first one that shows a profit.
Of course some people don't like to play this way. They like to take profits or they like to scale out as it moves their way. This is all well and good if there is a valid reason other than "this has gone really far." If you trade with the trend (and in forex the markets are renound for trending better than in other markets) you can capture a very large move simply by not being so quick to exit.
I would add finally, that it is always an eye opener when you read about how other traders have managed positions. If you research some of the best and highest earning traders in the world and follow what they did on the charts you will find as I did that if you took the same position, the moment you would look to exit is usually the moment that they are looking to ADD to their position.
Look at the traders that made a killing in the incredible fall that happened in Natural Gas futures. Go and look at a chart of that market. (see Natural Gas chart) On a daily you wonder how anyone that saw it didn't get rich. It's straight down. But then imagine being actually in it and seeing a sharp two day spike up from all the bargain hunters. Most, if not all of the people reading this, would, if honest with themselves, be long gone, patting themselves on the back for their profit even as the market turns and falls through the floor.
So to sum up: Have the strength of your convictions.
There are some traders that aim to take 10 pips a day and that is fine. If that is your style and you are consistently profitable then by all means do that. But if you want to trade off daily charts and make a living and if you consider that a stop on a daily chart may be 100 ticks or more, don't be rushing for the exit when you make 50.
This is not to say that any trader should hold blindly. But try and be logical. Look at price action and let it tell you where the market is going over the time frame. And remember the other participants in the market.
There is always a tug of war in the market but someone is going to win...and if you are patient, that someone may be you.
I would like to comment on becoming a winning trader by cutting losses and letting profits ride because I strongly believe that it is one of the hardest things for a trader to actually do but one of the most vital in becoming successful.
I think it is particulary relevant to people in this thread that are just starting out because James tells us to trade only off daily and weekly bars while we are learning and he also says that once we master that we will most likely neither want or need to use lower time frames.
The problem with this however is that the really good setups do not come along that regularly and when they do, they often require a large stop. As a result, to be consistently profitable over time it is vital that trades are allowed to develop but that losses are cut short.
I originally wrote this in response to a post on FF in which a trader, who wanted to make a living off of just daily bars, said that he had had approximately thirty wins and only ten losses but had wiped out his whole account. It turns out that just three of these trades swallowed all his money because he kept thinking they would turn around.
This trader went on to say that when he had had winners, his reaction was always the same - he would see his position positive and immediately close and take the profit – only to usually end up seeing the market continue in the way he had originally thought it would.
Since letting trades run is a topic Seeking has already covered, I thought it might help people if I posted it here too. I've tried to add some new things, including charts to illustrate my points.
My answer to the trader is as follows:
If you are in a situation where the position you have taken is significantly in profit, take a minute to sit quietly and think rationally. You need to focus on the fundamental thing that your position is now telling you.
You have called the market and you are RIGHT.
We know by its very nature that the market goes up and down so when we are losing we hope at some point it will come back and if we are winning we worry that it may turn and that we may give some, or worse, ALL of our profits back.
I quote from memory of another’s work (I forget the source) when I say that we are "taught" from an early age that:
a) If we lose something it will eventually come back (e.g. If you lose your car keys, not to worry, they WILL eventually turn up)
b) If you see something, take it or you might lose the chance (e.g. If you see money lying in the street, pick it up quickly because it may not be there for long)
This translates into our trading. If our position goes against us, we tell ourselves not to worry because nothing goes one way for ever and it must surely come back. If we are winning, we want to get out quickly because if we come back later, all our profit may all be gone.
The reason it is so hard to overcome this is because it has been "programmed" into us. To be a good trader, requires going against what we have had ingrained from an early age. To put it simply, it requires going against human nature - what our heads and our hearts tell us.
It's been repeated so often it’s boring. And yet all traders that don't make it into the elite 5% suffer a manifestation of the same problem. They are either not cutting losses early or not letting their profits run.
Have you ever wondered why the market always reverses after you get out? Late last year I went long the GBP at around 1.90 targeting a move to $2.
At the time the pound had made an attempt on 1.91 several times and then come off - it was like a barrier and I felt certain that once it was broken it would go straight up to $2. This time I was convinced it would give way under the pressure of constant testing.
However, once I was long, the market began to fall. And I held and I held. Every day that it fell, I moved my stop further back, convinced that it would soon turn.
When it got down to around 1.85, I closed out. Not because I thought it would go any lower but simply because I could no longer take the pain of losing. And what happened? The market turned at almost exactly that point and only a few weeks later it was trading at 1.98 - a full 800 pips up on my original entry. (see GBP/USD chart)
Now whether I am right or wrong I will tell you how I see this in my head. I see it as the market having to turn because all the amateurs like me have held their position for so long, past so many logical places to get out that finally the pain is FORCING them to bail out. And once the weak having been shaken from the tree, the market is ready to move up again. As I said, this may be wrong, but this is how I like to view it.
So how do you overcome this?
Pick a point before you place a trade that, if the market hits, proves you are WRONG in your analysis. If you see, for example, a double top, and want to go short, place your stop a little way above the double top.
I have done this before, shorted at what I consider a top, only to see the market move up through it. Rather than close, I would then move my stop further and further away with the reasoning, this climb cannot go on, its got to fall...it's just a market fake out...it will come down.
But here is the point: Who cares if it comes down an hour later? Or the next day? Your reasoning is that the double top is the turning point. If the market trades through it, you are WRONG. This is NOT the top.
What if it was only a fake out and the market then plummets? You likely end up frustrated. What if it wasn't and you keep moving your stop back? Well that's a quick way to the poorhouse. And I know which of these outcomes I think is worse.
Remember, the market has a way of frustrating every trader but the greatest traders are flexible. If you are wrong in the short term, close your position and wait on the sidelines where you can see clearly and wait for the market to move in the direction you thought it would.
Timing is everything when you are trying to make a living do this. If your timing is wrong, then get out. Sometimes the market may give you another chance but you can bet the time you need it to most, is the time you will get dragged out.
This may make you laugh but it took me, personally, just over two years to realise this simple truth: You have no control over the market. You cannot influence where it goes. The market doesn't know who you are; it doesn't care who you are, what you have or what you could lose. It goes where it goes and you either ride it or you get carried out.
So, that's how you should cut losses. How about letting profits run?
For me, a key thing to remember is NOT to look for reasons to exit a trade once it is going well.
I did this a few months back with the GBP/JPY. The trend overall was firmly up but it had suffered a rather sharp pullback over a few days. Then it had bounced at an EMA that I use and began making its way back up. So I got in based on this DAILY bar and near the end of the day it was up just over 100 points. Now I became enamoured with this 100 point gain. I had a considerable amount of money on the table and as such I started seeing reasons to exit.
Suffice to say, I found what I thought was a good one - the stochastic was overbought on the HOURLY - it was running along steadily just above the overbought line. So, out I came. Then, in the Asian session, the price steadied and while it did this the stochastic came slowly down to oversold and then began to turn up, even though the price has suffered almost no pull back.
The next morning the market was up strong again and just a few days later it was up 1,000 ticks on my original entry. (see GBP/JPY chart)
For me, the emotional pain I felt at being in it, then exiting and missing the massive move, was the same as, if not worse to just having LOST in the first place.
I spent five months trading from home and gradually lost all my money. Looking back, that one trade could have been the difference between me being still at home trading for a living and where I am now - which is back in the daily 9-5 in an office doing a job I hate.
So, of utmost importance - remember why you entered the trade in the first place. With price action you can do this by STICKING TO YOUR TIMEFRAME. If you took a pin on the daily, do not get shaken out by a pin in the opposite direction on the hourly.
Sometimes you learn something when you least expect it. I actually had an epiphany of sorts when my girlfriend who knows absolutely nothing about the markets at all said to me: "Everyone has different reasons for doing things - they all play the game a different way."
This is the reason why the market goes up and down. Everyone is buying and selling based on different thought processes. Different strategies. Different methodologies.
But your reason is based on YOUR methodology so forget the other players. Let the market guide you.
In my opinion, a 20 tick pullback in a 100 tick move up is not a sign that the move is reversing. It is natural and it is inevitable. Consider the other market participants. In the short term they may want to scalp a small move or they may be hedging and therefore taking a position for another reason UNRELATED to profiting. These buyers and sellers will cause temporary fluctuations in price but actually exiting a good trade should be done when YOUR reason for entering is WRONG not just because it is suffering a temporary setback.
Let's look at price action since that is what James teaches.
If I enter on the break of a daily pin bar, (with a stop loss of say 100) I EXIT either when:
a) The daily bar gives me a sign the move is over and that signal is then CONFIRMED e.g. Signal may be another pin that appears, confirmation would be the break of it
b) My original stop is hit.
If I get in a trade and the market is up 300 ticks on the first day, I still have my stop loss where I could lose 100 if I get hit when the new session starts.
Each day I will trail my stop depending on the price action of the previous session. If you are long and in profit and then a bullish outside bar develops, then place your stop just underneath that bar because a reversal back underneath it means the trend is not as strong at the moment as you had thought.
But always try and remember – simply being UP is not a consideration for getting OUT.
Some people take these signals and close on the FIRST DAY because they have made a killing. Just think for a second - You are trading off a daily bar. You've had just ONE go in your favour. Try this. Look at a massive trend that you would like to have caught. (I've attached one for you - see the Dow chart) Look at a possible entry such as the double bottom, or any of the many swing lows. Then count how many daily bars made up the rest of the move, from bottom to top. Now consider exiting on the first one that shows a profit.
Of course some people don't like to play this way. They like to take profits or they like to scale out as it moves their way. This is all well and good if there is a valid reason other than "this has gone really far." If you trade with the trend (and in forex the markets are renound for trending better than in other markets) you can capture a very large move simply by not being so quick to exit.
I would add finally, that it is always an eye opener when you read about how other traders have managed positions. If you research some of the best and highest earning traders in the world and follow what they did on the charts you will find as I did that if you took the same position, the moment you would look to exit is usually the moment that they are looking to ADD to their position.
Look at the traders that made a killing in the incredible fall that happened in Natural Gas futures. Go and look at a chart of that market. (see Natural Gas chart) On a daily you wonder how anyone that saw it didn't get rich. It's straight down. But then imagine being actually in it and seeing a sharp two day spike up from all the bargain hunters. Most, if not all of the people reading this, would, if honest with themselves, be long gone, patting themselves on the back for their profit even as the market turns and falls through the floor.
So to sum up: Have the strength of your convictions.
There are some traders that aim to take 10 pips a day and that is fine. If that is your style and you are consistently profitable then by all means do that. But if you want to trade off daily charts and make a living and if you consider that a stop on a daily chart may be 100 ticks or more, don't be rushing for the exit when you make 50.
This is not to say that any trader should hold blindly. But try and be logical. Look at price action and let it tell you where the market is going over the time frame. And remember the other participants in the market.
There is always a tug of war in the market but someone is going to win...and if you are patient, that someone may be you.
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