During 4M class Wednesday 03 September, I ran a spontaneous experiment/game. Volunteers are invited to take part in a challenge to hold a position until it reaches target or is stopped out. Participants are those who tend to close their positions prematurely. This challenge helps them to understand themselves/ master their psychology while I cover their risk. I conducted this spontaneous experiment/game with the help of 5 volunteers. The objective of the experiment was to address a very common problem among our community of traders: weak psychology. Individuals who have this problem encounter anxiety when they have running position. Result? Positions are closed before target levels are reached. Exiting a position prematurely is no big deal if one has a profitable trade. Unfortunately this problem of interfering affects trading performance over long:
- Trade setups are not given the chance to succeed because losing trades are exited prematurely too.
- Long term consistency is compromised because risk-reward ratios are not observed.
- Positions are handled in an emotional manner, not rule-based.
Observation from years of working with new traders
Through years of training, I observed that traders cannot hold onto a winning trade due to weak psychology arising from:
- Fear of loss
- No proper planning of their trades; not aware of their exit points either their stop loss or target profit
- Too large a position size
- Negative reinforcement from previous encounters
Training solution required
I feel that a training solution can be found.
- I will cover their loss to address problem 1 – fear of loss.
- We will plan the trade together live during 4M class to address problem 2.
- I will enforce the position size of 1 micro contract to address problem 3; the intention is not the money but to gain experience of sticking to the trade until we reach the finish line.
- Every participant should have a positive encounter so that we can cultivate a positive reinforcement to break their cycle of negativity i.e. problem 4. Therefore I will also cover their downside so that they can focus themselves on the ride to the target.
80-pip AUDSGD Trading Psychology Challenge
With this experiment/game the ’80-pip AUDSGD Trading Psychology Challenge’, we challenge traders to hold their positions until target price is reached.
- Idea: to let students experience the process of holding a trade until target achieved or stopped out.
- Currency pair: AUDSGD (this forex pair was selected because it has qualities we look out for with our style of trading)
- Typical Tflow® setup
- Positive swap while holding and waiting to reach target price
- One of the slower pair, with plenty of volatility (candlestick ‘hair’) – tests nerves and endurance
- Stop loss: 80 pips
- Target: 125 pips
- Contract size: 1 micro
Each participant received $8 from me handed out on the spot to pay for their potential loss. If they win, they keep their winning and my $8. In return, I hope they give us their experience of the entire encounter so that other students can benefit. Once entry was identified, participants placed their orders. This is a chart submitted by one of the participants showing the entry price, stop loss and target price. Reward to risk ratio is around 1.5:1.
- Trader C – Female, retiree, likes to close trade within a day, each trade about 30 pips but suffers up to 50 pips loss.
- Trader D – Male, middle-aged self-employed, inconsistent behaviour, tends to overstay trades and would get stopped out. Aspire to be self sufficient via trading.
- Trader S – Male, worked at forex broker for many years, scalper. In his words, able to hold a trade 40% of the time only. Trying to move towards position/swing profile.
- Trader V– Male, on his 20s, exits winning trades too quickly.
- Trader G – Female, young.
In case readers feel that $8 reimbursement/ 1 micro contract for this challenge is too little, I feel that it is perfectly suitable. My TerraSeeds Tflow® Forex Trading Course works with individuals who are new to forex trading. Although many are white-collar and well heeled, some are risk-averse because they have never traded/invested in other markets at all. A 1-micro position size is small but the psychological hurdle involved for new traders is a big one. In my opinion, this psychology should be handled with care. Doing the right thing from the beginning creates a cycle of positive reinforcement and helps individuals to have a positive mindset. Setting on the wrong path creates fear and cultivates bad habits. How individuals handle small positions now affects how they handle large position sizes in future.
This is a very important topic which I will make this posting stick to the front page of the blog for a while. I am going to post updates and to ask participants to give feedback how they feel. Individuals who have encountered the same problem stated here I invite to log in and discuss your problems here as well.
Updated by Binni Ong 8 Sep 4.07pm
AUDSGD reached highest price 1.1781 on friday night, 2 days after the challenge. At 1.1781, we are 19 pips away from target profit, 106 pips in profit from entry.
Trade management is equally important as trade entry. At this moment, we have bullish day and weekly close, so it is prudent to shift stop loss to break even, that is, for this trade, if it should turn against us, there will be no losses.
Let’s wait to see how this trade pan out, remember trade your plan. Right now this trade has been shifted to break even. Your psychology will even be stronger because if you were to lose, you lose zero dollar. This is a free trade!
I like to make positive impact to people and I’m glad I did.
was chatting live with Simon while he was at class. Initiated same time as the class of my usual size. Will … http://t.co/niyHch2AMw
— Dominic Lio (@DominicLio) September 5, 2014
Updated by Binni Ong on 10 Sep 2014 2.05pm
— TerraSeeds FX Tflow® (@terraseeds) September 8, 2014
AUDSGD trade has been stopped out at break even. Price is now 1.1580.
This trade is a break even trade. We didn’t make any money from this. BUT we didn’t have any losses.
However, what you gained will be lots of positive psychology and reinforcement.
I hope you have benefited from it.