This week’s question comes from Carol, who asks:
If a trader achieves $1,000 of open profit but then panic sets in what can be done to secure the trade and account with as little pain as possible, rather than close the entire position?
A few things come to mind, but the first thing that struck me here is the word panic. If you ever find yourself panicking about a trade, chances are your position size is too big for the size of your account.
This is true regardless of whether you’re managing unrealized gains or losses.
Take for example someone who has a $100,000 account. Do you think this trader will panic over an open profit of $1,000? Will they be tempted to close the position just because they’re afraid of “losing” those unrealized gains?
Now, if we compare the person with $100,000 of risk capital to someone with just $500, it becomes evident who is more likely to become anxious about securing a $1,000 gain.
The bottom line is that a position size that is too large for your account balance is the number one cause of emotions in trading.
But this is just one reason a trader might become anxious when managing unrealized gains. There are a few others that come to mind along with some possible solutions which we’ll discuss in this post.
The best way to avoid panicking in any situation is to have a plan. In fact, that’s true for anything you do in life, not just trading.
Before you ever put on a trade, you should have a plan. Otherwise, it simply isn’t worth the risk.
A plan keeps your logic intact. It’s also the only tangible thing you have that was created before putting capital at risk.
You see, the moment you put money at risk, you’re no longer neutral. As soon as money is on the line, you have something to lose which can compromise your judgment.
But that trade plan was created before you put a single dollar at risk. It’s the only thing that will keep you composed and thinking clearly when the market moves against you. Or worse, when things really go south.
And trust me, it will go south. It isn’t a matter of if but when which is why having a plan of attack is so important.
It doesn’t matter how you create it. It can be an Excel spreadsheet, Word document, notepad or a whiteboard. The important part is that you have one.
It also doesn’t need to be sophisticated or super detailed. Simply having your reason for entering, a few key levels and an exit strategy is enough.
In fact, I urge you to keep it simple. The more complicated and time consuming you make it, the less likely you are to stick with it over the long haul.
Once you have a plan in place, it’s as simple as seeing what the market does and following what you wrote.
These are all questions you should have answers for before ever pulling the trigger. Of course, you’ll need to keep track of the specific price levels that pertain to the pair you’re trading.
Remember, the more prepared you are for every possible outcome, the less likely you are to panic when managing open profit.
You’ll no longer be guessing or letting money control your decisions. Instead, you can just reference your plan and go from there.
We have a saying in the U.S., don’t bet the farm. It’s particularly popular in the south but applies to anyone anywhere regardless of the activity.
It means don’t risk everything you have because you’re certain about the outcome of something.
As a Forex trader, I’m sure you can relate to that right away. One of the most common errors among Forex traders is over-leveraging their account. In other words, taking a position that is too large for the size of their account.
I think Joe Vidich said it best…
If you find yourself making decisions based on the open profit or loss in your account, try cutting your risk in half. So if you’ve been risking 5% of your balance, reduce it to 2.5%.
Even if you only risk 1% of your balance but still find yourself panicking try cutting it to 0.5%. The point is to make it so small that neither fear nor greed has a hand in your trading.
Becoming a successful Forex trader is a marathon. It takes years, not days weeks or even months. Those who treat it like a sprint fall on their face before ever reaching the finish line.
The prior topic is a perfect segue into what is perhaps the most important mental shift you must make to become profitable.
Stop focusing on the money. In fact, forget about it completely.
Obviously, you still need to consider it when calculating a position size. But as far as trying to make more of it, don’t even think about it.
This is one reason I’m so against signal services. The primary driver for those who pay for such a service is to make money.
That’s a big mistake. It flies in the face of everything any successful trader has ever said.
Those who come into this market looking to make a quick buck get chewed up and spit out. And that’s putting it lightly.
Want to know how to make money in this business?
First, forget about making money. As long as you’re focused on becoming the next Forex millionaire, you’re preventing the objective mindset necessary to succeed.
Second, start focusing on the process.
These are just a few of the things that will eventually make you money. But focusing on turning a profit tends to drain one’s account rather than grow it.
Here’s one last practical technique you might want to try.
Instead of holding the entire position from entry to target, experiment with taking partial profit. Just as I sometimes scale into a position, you could try scaling out when faced with managing an open profit.
For example, if you have a 100 pip stop loss, try booking half of the position once the pair has moved 100 pips in the intended direction. You can then leave the other half on to capitalize on the rest of the move.
If you live in the U.S., you may need to split your position into two blocks. But where there’s a will there’s a way.
I know some of my members have found success using this technique. It relieves some of the pressure and also makes it a risk-free trade, theoretically speaking.
To be clear, this is not something I do or even teach. I tend to approach a profitable position from an entirely different mindset.
As long as the currency pair is moving in the intended direction and thus validating my idea, I’d rather add to the position than reduce it. That’s how I maximize my winners so I can pay for the losers.
It’s the old 80/20 rule where 80% of my profits come from 20% of my trades. Some months it’s even more skewed than that.
But as always, you should experiment with different techniques. It’s the only way to find what suits you best.
You may find that booking partial profit is the way to go. Or, if you’re like me, you’ll decide to take full advantage of winning trades by scaling in rather than scaling out.
At the end of the day, trial and error is the only way to find what suits your personality.
One of the very best ways to avoid panicking when managing open profit is to have a plan. Be sure to create it before you enter the market so as to have an unbiased plan for every outcome.
Becoming a profitable Forex trader is a marathon, not a sprint. There’s no need to over-leverage your account. If you face $1,000 of open profit on a $500 account, you’re sure to panic if the market moves the slightest bit against you. Keep your position size small to mitigate the risk of emotional trading.
To make money consistently as a Forex trader, you have to forget about making money. Instead, focus on the process of becoming a profitable trader. Do that, and the money will follow.
Be sure to test various techniques for managing open profit. There’s no single best way; only the one that works best for you.
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post: