Education

The Escalation Of Failure In Trading

Updated

The escalation of failure in trading ! : 5 reasons why most of traders lose their money !

Reason 1 / Step 1 : The "I DON'T ACCEPT LOSING" syndrom
Reason 2 / Step 2 : The "I MOVE MY STOP LOSS" temptation
Reason 3 / Step 3 : The "AVERAGE DOWN" disease
Reason 4 / Step 4 : The "RISK EVERYTHING" game
Reason 5 / Step 5 : The "I SWEAR IT WILL NEVER HAPPEN AGAIN" lie to yourself

Let me tell you the story of JOE the gambler :

Joe creates an account with $1,000 with a broker offering a x500 leverage. Virtually, Joe could invest almost $500,000 on the market ! Amazing !
Joe thinks that he is a reasonable investor and start investing with 0.05 lot.
Joe creates an account with $1,000 with a broker offering a x500 leverage. Virtually Joe could invest almost $500,000 on the market ! Amazing !
So Joe has $1,000 on his account. He has a very good investment strategy which has worked very well for 1 month on demo account.
Joe's projections gives $250 profit in one month.
It is time now to pass on real account. Joe has read many articles about money management and joe wants to risk only 3% of its capital on each trade.
Joe's strategy is to take trades only if a combination of several indicators give the same signal. Joe always use stop loss and take profit. The plan is the plan no matter what ! Right ?!

Joe bought 0.05 lot on EURUSD at 1.2200 with a SL at 1.2150. He thinks that the price will increase from 100 pips at least in the next hours to reach 1.23.

Reason 1 / Step 1 : The "I DON'T ACCEPT LOSING" syndrom
Problem, the price falls from 40 pips. Joe starts panicking.

Reason 2 / Step 2 : The "I MOVE MY STOP LOSS" temptation
Joe decides to move the SL from 50 to 100 pips at 1.21.

Reason 3 / Step 3 : The "AVERAGE DOWN" disease
Problem, the market decides to go down again and the position shows a 80 pips floating loss. Joe decides to move the SL from 100 pips to 150 pips at 1.2050 and take a new position of 0.05 lot on EURUSD at 1.2120 with a SL at 1.2050.
Problem, the market continues its fall and the price displays 1.2070. Joe thinks OK. I move my SL from 1.2050 to 1.1950. It gives more margin to let breathe the market and Joe takes a third position of 0.05 lot at 1.2050 with a SL at 1.1950.
The average price is now 1.2123.
Problem, the next days the market starts a range between 1.20 and 1.21 and Joe wants absolutely to leave the overall position in profit. Pride !
Joe loses patience and decides to take a new postion of 0.1 lot on EURUSD at 1.2070.
The average price is now 1.2102.
Joe is stressed and tired of this situation and decides to put an overall TP at 1.2120. The probability to hit the TP is high.
Finally the market goes up and hit the TP during the night and when Joe wakes up the the price on EURUSD is 1.2200.
Oh my GOSH !
Joe is frustrated ! Why did I change my TP ? I missed a lot of profit on this movement !!!
Joe decides to take a new trade on EURUSD at 1.2200 without SL this time because this time is the right one !!! Pride !!!
Problem, the market falls from 25 pips at 1.2175. Joe is convinced that he is right so he takes a new BUY pending position at 1.2150.
And now the market makes a huge falls from 1.2175 to 1.2050 during the day.
Joe has now 2 positions of 0.05 lot size. At this moment, Joe decided reasonably to close all positions with losses at 1.2050.
Joe lost 275 pips on these 2 hasardous trades.

Note

Reason 4 / Step 4 : The "RISK EVERYTHING" game

Joe has a deep thinking which leads to the decision to take a big time to recover all the losses in minimum time.
Joe take 1 lot size on EURUSD. He need only 30 pips to recover all losses. AND Joe promised. It is the last time! The PLAN is the PLAN ! Right ?
Joe has the feeling that the market is bearish now. He takes a SELL position on EURUSD at 1.2020 with no stop loss and a take profit at 1.20.
During the night, the market goes down to 1.2005 and goes up to reach back 1.21.
Joe wakes up on the morning with the surprise to see that his broker has closed all the positions due to insufficient margin.
Joe has crashed his account.

Reason 5 / Step 5: The "I SWEAR THAT IT WILL NEVER HAPPEN AGAIN" lie to yourself

Joe decides to make a refill of his account and he does not respect his strategy.
Will it really be the case ?

Note

Morality :

If Joe had kept his SL at 1.2150. It would have lost 50 pips. The market would have continued its fall until the 1.20-1.21 area.
At this moment Joe could make a new chart analysis in order to detect a new 1.20-2050 whic was in fact a new support area.
Joe would have taken a new position of 0.05 in order to reach back 1.2150 or 1.22. If joe had complied with it he would have gotten 100 to 150 pips on this second trades.

- Always respect your strategy no matter what happens.
- Learn to accept your losses to make more profit.
- Always use a stop loss.
- Never move your stop loss in a losing config.
- Never buy on resistance levels.
- Never sell on support levels.
- Follow a strict money management rule.
- Never make a difference if it is not part of your strategy.

Note

Never make an average down if it is not part of your strategy.

Note

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