Trading is a game of emotions. A psychological battle is fought in the minds of traders around the world, and until the trader wins this inner battle, losses will always be in the order of things.
As someone once said, “We met the enemy, and he is us.”
There are two basic emotions that need to be overcome: fear and greed.
Fear comes in two forms:
1.) Fear of loss: Every trader, when placing a trade, is afraid that it might go wrong and the trader might end up taking a loss. It is this fear that prevents traders from placing stop losses. They never want to take a loss. They hope that any trade that goes against them will eventually improve, and they don’t want to feel the pain of losing at any cost. Unfortunately, many traders have destroyed their accounts as a result of avoiding small losses. Understanding that losing is part of the trade and using stop losses when you are not risking more than 1-2% of your capital is a winning method.
2.) Fear of returning profits. There is an old adage in trading: “Cut your losses and let your profits run.” Most novice traders tend to do the opposite. They let their losses spiral out of control and take profits too early. Traders fear that the immediate profits they are witnessing could be lost and quickly close out any small profits they see. The problem here is that winning trades are not allowed to play out completely, and as a result, when losses do occur, the trader is left with a net loss at the end of the day. Using take profit at certain target price levels in accordance with a winning strategy is the best way to deal with this problem.
A good way to overcome these two fears is to do what is called scaling. Instead of opening a trade with one click, break it down into smaller parts at roughly the same entry level.
For example, instead of buying 10 lots of EUR / USD at 1.3500; instead, you can make 5 trades of 2 lots each at a price of about 1.3500. Thus, you will have 5 trades instead of one.
You can then exit the first 2 lots with a profit of, say, 4 pips (at least you have taken care of the fear of losing).
After that, you can exit the next 4 lots for a profit of 10 pips, and then raise your stop to the entry level (you have taken care of the fear of losing).
Then you can allow the last 4 lots to reach the profit target (here you have taken care of the fear of returning the profit).
Scaling is one of the best ways to deal with your fears. Happy trading.