The No 2 Forex Trading Mistake
While the No 1 Forex trading mistake is to fail to follow your own set of trading rules, the No 2 mistake that most foreign exchange traders make is to start doubling up on losing trades. Surprisingly enough the reason for making both of these mistakes is usually the same.
The No 1 mistake that most Forex traders make is to set themselves a set of trading rules and then fail to stick to them because they allow their emotions to come into play so that their heart, rather than their head, rules their trading. The No 2 mistake that most Forex traders make is to start doubling up on a losing trade and, once again, they make this mistake for exactly the same reason.
You cannot allow your emotions to take over when it comes to foreign exchange trading and yet, time after time, that's exactly what happens.
When you find yourself in a losing trade then, providing you've done your homework and entered this trade on the basis of the numbers, and not on a hunch, the simple fact of the matter is that the market has unexpectedly moved against you.
This is something that happens to traders every day and is nothing more than a fact of Forex trading. It occurs because, no matter how much we like to think that the market is predictable, it isn't. Yes it will generally follow a pattern and the sophisticated tools that we have at our disposal will pick this up and allow us to trade profitably more often than not. But the market has a mind of its own and it will frequently catch out even the most experienced of traders.
The problem however is that it is human nature when you find yourself in a losing trade to feel that this is only a temporary situation and that the market will turn back in your favor, turning this losing position into a winning trade. This happens because, otherwise, it would mean that you were wrong about this trade and most of us don't like to admit that we're wrong.
But human nature takes you one step further and often compels you to take action to reinforce your original decision and to demonstrate your confidence in that decision. So, what do you do? You start to double up on this losing trade to show your confidence in it and also, subconsciously, because when you're proved right your final profit will also be that much greater as the trade recovers from a low position. In other words, the little green demon of greed also creeps in at this point.
Now sometimes you'll be lucky and the market will indeed turn around and give you a nice profit. However, this is simply compounding the error you've made in doubling up on a losing trade by encouraging you do the same thing next time you're in this position. Invariably of course your luck doesn't hold and the next time you'll lose heavily.
So how do you avoid this mistake?
You made the mistake simply because you found yourself in a position in which your judgment about a trade was being challenged and you were facing the uncomfortable position of having to admit that you were wrong. The real problem though is that you weren't wrong at all and that there was no need to take the action which you did in the first place.
Based on the numbers you were given, your judgment was quite right and there was no reason at all why you should not have entered this trade just as you did. Unfortunately, the market then decided to take an unexpected turn which neither you nor 99% of the other Forex traders could reasonably have been expected to predict. You didn't make a mistake at all, but simply experienced the unpredictability which is an everyday part of foreign exchange trading.
The mistakes that we make as Forex traders are generally nothing more than a case of allowing emotion to creep into our trading decisions. The foreign exchange market is a technical market and you must approach it as such and trade accordingly if you are to succeed.
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