Reduce your Risk of Ruin by making use of the “Trade small, Trade Smart Concept”

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One of the most deceiving statements in trading is “ you need to risk more to make more” or “risk a lot to make a lot”. That’s simply not the case, on the contrary, traders should seek to risk less in order to make higher return.

When trading a prop firms capital, you need to understand that your risk to reward and win rate plays a vital role in your trading psychology, which in return could guarantee a successful outcome or vice versa according to how we manage these various factors.

No matter how good a trader gets, losing trades happen, sometimes several in a row. The more risk on each trades, the higher your “risk of ruin”, which is the possibility that you could lose everything. A propriety trading firm is always in need of profitable traders, who understand the importance of applying good risk management techniques, and for this reason, some certain restrictions are placed on trading accounts to enable traders, stick to good trading behaviors. Such restrictions could include the following; total maximum loss and maximum daily loss, profit targets, minimum trading days, maximum trading days and so on. Several traders feel that one of the ways to avoid such restrictions is by getting a larger account size, but things does not always turn out the way they expect, and this is simply because of the psychology of greed and fear in trading larger account. Although, it is not always the case for traders who are already used to trading bigger accounts sizes.

What is your Risk of Ruin?

This is the amount of capital that you are willing to risk before you have to stop trading. (Commonly referred to as the “ruin point” or “maximum drawdown”). Note that this is not the total capital in your account. The risk of ruin is a statistical concept that matches the probability that you will reach that point of ruin. Ideally, you should never have a drawdown of 50% because then you’ll need a 100% return just to break even.

The Psychology of Greed and Fear in Trading the Forex Market.

There is an old saying on the Wall Street that “pigs get slaughtered.” This refers to all forms of greedy trading behavior that does not portray any form of risk management. The hidden fear of losing a trading account is always seen in traders who exhibit high level of confidence and greed when choosing a trading plan, which makes them more vulnerable to market fluctuations. and in return, increases the risk of ruin when several losses occurs.

Greed and fear has a psychological impact that affects trader’s performance. A trader’s mind is a great asset or liability which has the potential in building a successful trading career, even while taking advantage of the opportunity that has been created by propriety trading firms. Trading psychology is highly important to ensure that all trading decisions are made with discipline, confidence and consistency. Excessive greed is an extreme and abnormal type of greed in majority of traders, and this is the number one cause of large drawdowns which may lead to blowing of trading account. Greed can also change your way of thinking to an extent that you want to trade every movement the price makes in the market.

Fear is an emotional feeling that comes up as a result of failure, rejection or pain. Most times fear comes as a result of greed after experiencing a big drawdown on your trading account. It can cause panic which leads to wrong decision.

How Fear Affects Your Forex Trading

1. Fear To Lose On A Trade.

The fear of losing a trade can make you miss on potential great opportunities.

It causes procrastination within you. You find yourself undecided whether you should enter a position or not.

By the time you feel confident enough to take the trade, it’s already hitting your anticipated profit target.

This kind of behavior is common especially in new Forex trader. It is likely to happen after you have suffered a large draw down than your emotions can handle.

Similarly, you sometimes enter a trade when it has moved a few pips against you, you panic and close it prematurely. This is because you are scared of making a large loss again. When this continues, it can lead to loss of confidence in yourself and you may even start doubting your strategy. Experiencing losses is normal in Forex trading. In probability you have to always expect a win or a loss. when you worry so much about the result you may never take any trade at all. In Forex trading, you have to learn to accept losses as part of trading and stick to your trading plan. Revise your trading journal always and learn from your previous mistakes. Manage your risk properly so that you don’t get large draw downs that breed fear.

2. Fear Of Missing Out Trades

Forex market offers as many opportunities as possible and you can trade at any time without any kind of limitation. This doesn’t mean that you have to trade all the setups in the market. Apart from the fear to enter new trades, some traders want to trade every setup that surfaces in the market and so they fear missing out. This can also be some sort of greed. You are always in the market trading all the time. When you see the market rallying up, you jump in because you don’t want to miss out on that. If it rallies back down you also follow. That’s not even close to gambling. you are just trading with no plan.

3. Fear of Not Being Right

In forex trading, there is no perfect trader, and no one is going to blame you whether you are right or wrong. It is only you and the market. In order to be a successful trader, it does not require you to be right all the time but to believe in yourself, your strategy and trade with discipline. If a trade fail, you can not force it to move into your direction. Learn to cut your losses and wait for another opportunity.

Ways To Deal With Greed And Fear

1. Create a Trading Plan

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A trading plan is an organized approach to executing a trading system that you have developed based on your market analysis and outlook, while factoring in risk management and personal psychology. No matter how good your trading plan is, it won’t work if you do not follow it.

If you don’t know where you are going, any road will get you there. In trading, if you don’t set out a plan for your trades and develop strategies to follow, you have no way to measure your success. The vast majority of people do not trade to a plan, so it is not a mystery why they lose money. A trading plan helps you maintain discipline as a trader. it would help you trade consistently, manage your emotions, and even help to improve your trading strategy. it is important to use your plan. Many people make the mistake of spending all their time creating a plan, then never implementing it.

2. Discipline

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Winning traders are disciplined, they control their impulses, feelings, and this allows them execute a trading strategy effortlessly and flawlessly. The disciplined trader is decisive, the undisciplined trader in contrast wavers. He or she stick with a trading plan occasionally while going a different way at other times. Discipline is indeed a key ingredient to success, but not everyone has a high level of self-discipline. If you lack discipline and self-control, work to build it up.

Discipline and self control are well-studied personality traits. Some people are highly disciplined and very self-controlled. They scrupulously follow rules and are careful to control their impulses. You know their type; they pay off their credit cards every month, are never late for an appointment, and carefully plan every detail of their lives. Although these characteristics may be ideal for trading, there’s a downside which is that such people tend to have trouble taking risk. They prefer a sure thing, and trading outcomes are rarely sure things. Traders tend to prefer living a little on the wild side.

They may not recklessly seek out risk, but they don’t mind it. Relatively speaking, they tend to lack discipline and control. Perhaps that is why so many trading books and coaches find it necessary to preach the virtues of self-control. How is your discipline and self-control? Do you have trouble sticking to your trading plan? Do you long for more discipline and self-control when it comes to your trading? If you have trouble with discipline, you may want to try a stimulating exercise to increase your awareness. Observe your level of self-control in your everyday life and try to gain more control.

How much discipline and self control do you practice in your everyday life? Are you late for appointments? Do you spend more money each month than your budget allows? Do you frequently find yourself breaking promises? It is not necessarily the case that a disciplined trader is disciplined in all aspects of one’s life, but it helps. The life strategies we use in everyday life may bleed over into our trading life. If you often overspend, overeat, or have an unrestrained need for pleasure, you may find maintaining self-control and discipline while trading a little more difficult than others.

So try this exercise: spend a few weeks trying to control as much of your life as possible. Pick specific areas where you can gain more self-control. Control your caloric intake, the money you spend, and time spent in leisure activities. See how well you do. It may change your reference point. You may soon discover that you rarely control your impulses, and can do much better. And this, in turn, may positively influence your ability to stick with your trading plan. It’s worth trying. Discipline is the key to trading success. and it is vital that we do everything we can to increase it.

3. Keep A Trading Journal

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To overcome greed, you first of all need to learn to take responsibility for your actions. You have to be accountable to yourself when trading. A trading Journal tracks the performance of your system, hence you can evaluate the result of your trades. In addition, you will be able to know what works and what doesn’t, the common mistakes you make while trading and then rectify them.

Keeping a trading journal is a smart strategy to enhance performance and gain confidence in executions. Success in forex trading requires a high level of planning and practice. To be consistently successful in trading, forex traders need to go through a comprehensive learning process. The best tool to guide and optimize a forex trader’s system is through the use of a trading journal. If you plan on becoming a successful trader through performance, trading journals can steer you faster towards a profitable career.

A trading Journal is one of the most effective tools for performance management. it is where you record and review daily trades for better output and for future reference. A journal can help you track progress as well as study mistakes made when entering or exiting a trade. In the long run, these reports can act as the foundation for better executions.

With a trading journal, forex traders can develop profitable strategy based on trading experience. Over time, the advantages are valuable for trading efficiently. If consistently and diligently updated, your trading journal will be the key to favorable trades.

4. Have A Risk Management Plan

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Two of the main reasons why forex traders lose money are stop losses that aren’t used properly and unnecessarily large trading positions that are held far too long. Improperly used stop losses are especially troublesome for novice traders who don’t have the ability to plan long-term strategies around them.

Entering a trade with only calculated profits in mind can be disastrous for your wallet; you must also calculate a protective stop-loss. You should determine a realistic risk-to-reward ratio, which will help limit drawdowns and assist you in selecting essential stop-losses and target limits for your trades.

A stop loss limits your losses by setting an order a defined numbers of pips away from your entry point or a certain percentage below the price of purchase. This limits the total amount you can lose.

be smart about your position size, and always remember that increasing your lot size also increase your risk. If you increase your risk too much too soon, there’s a chance that your account will blow out, especially if you’re using a large scale leverage.

5. Trade Small, Trade Smart Strategy

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In order to maximize the benefits of growing profitably while maintaining a psychological balance, which is important for propriety firm traders, the trade small, trade smart strategy has been tested over a variety of traders who exhibits different trading techniques, and it has been observed that traders do well, when the purpose of trading is to grow in the forex industry, than when the sole purpose of trading is for large cash out of profit over a few clicks of entries and exits. Traders with a growth mentality are always searching for ways to understand more and learn more on their fundamental and technical analysis while building a good risk management trading technique. They also grow their profit into a substantial figure and this is what a successful trading system entails. The psychological pressure of a series of losing trades is more when trading a large account size with larger lot sizes and this has the ability to affect the judgement of traders which in most cases, leads to the greed of getting back at the market in order to recover what was lost or the fear of making further mistakes which has lead to a lot of abandoned trading accounts. Before attempting to trade a large Evaluation capital, traders must get used to the intentional act of growing a smaller account in a consistent manner, and also grow trading capital in a scaling ratio that does not create much impact on the trader’s psychology. unless you are used to seeing large figures in the form of either profit of loss, it is advisable to make use of the trade small, trade smart strategy.

The fear of losing a trading account usually comes after the greed of choosing a large trading plan. And in most cases, this greed comes with a “I can do all things mentality” of which forex trading is one place it doesn’t apply. Another common mistake that has led to the blowing of large trading account is the fact that most traders are fond of following the lifestyles of exotic social media traders who usually post profitable trade history. This lack of independence in majority of forex traders has led them into copying the trading styles of other traders, even when such trading styles does not suit their personality type.

It is advisable for traders to stick to these five simple ways to deal with greed and fear in order to grow into a successful trader.




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