Costly emotions for a trader
Professional traders close orders when they know the exact moment of exit. Beginners open orders when they see an excellent opportunity for entry. Therefore, their risk management strategies are vastly different.
👳 Raja is an intraday trader who opens and closes orders based on moving averages. Once, he had a miserable day.
The awful day
9:00 a.m. to 12:00 p.m.
After researching several potentially profitable opportunities, Raja decided to make a move. He immediately opened five orders with considerable risk at 2%. The market was not in his favour that day as all of his orders automatically closed at the Stop Loss level, leaving only 10% of previous capital intact, which was devastating.
12:00 p.m. to 3:00 p.m.
Raja stuck to his strategy and opened four more orders to cover his previous losses. After funding his account with more capital, he quickly lost another 11% of his remaining balance.
At this moment, his psyche broke and became unable to cope with the stress of having lost 20% of his capital in just a few hours.
4:00 p.m. to 5:00 p.m.
When your psyche is in such a fragile state, you’re incapable of reason, and you can think about only revenge, and that’s just what Raja did. He opened one last order with 5% risk and ended in the loss. The series of loses culminated to a total of –23.8%.
Is trading not for me’ or was I tilted?
After a few days, Raja once again uncovered suitable opportunities to enter the market, but was too hesitant to place the orders. Raja’s emotions were deciding his actions; this is commonly referred to as tilt in Forex trading. Traders are unable to execute their strategy and are only guided by their emotions. As a result, they lose money, but what’s even worse is their motivation and self-confidence evaporates, too.
Patience bears profits
Raja employed the 2% rule but neglected the 6% rule, and subsequently lost more than he could afford.
The rule of 6% indicates the level of acceptable losses per day. Exceeding this threshold could have many adverse effects.
When losing more than 6%, you panic, question everything, and start making unwise orders.
Let’s see how much Raja could earn by using a better risk management strategy.
👳 Raja’s strategy
💵 Ideal strategy
While Raja may have lost his profit, he did gain valuable experience. Taking into account not only your mistakes, but mistakes of others can vastly improve your trading strategy.