Man’s Best Friend – NOT!

Interestingly enough, your subconscious is agreeing with Fido, every time you take a trade…

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Let me explain.

Everyone who has been trading Forex for a while knows the golden rule, and that is to cut your losses short and let your profits run.  But a quick review on a typical retail Forex trader’s account, you will probably find tons of small profits followed by huge losses… Sometimes the losses are so big they wipe out weeks of profit or even a good portion of the starting balance…   This problem is not only isolated to novice traders, because if you’ve been following the news lately, you’d heard of scandals on billion dollar of losses from some of the most prominent financial institutions’ “foreign exchange trading desk”… 

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I guess to fully understand this problem that every trader is facing, we must understand human nature, and it is best illustrated by examples of Positive and Negative framing…

Let’s say that you are guaranteed to win $4000 right now and you are given a chance to win $1000 more ($5,000 total) with 80% of odds of winning.  If you win, you’d go home with $5000, but if you lose, you’ll end up with nothing, not even with the $4000 you started with.  So the choice is yours, take $4000 now or take a chance at $5000 with a 20% of possibility of leaving with nothing. What would you do?

80% of people will choose the $4000 and not the gambling scenario.  But let’s change the situation around and see what you’d do:

You are guaranteed a loss of $4000 right now and you are given a chance to lose more (80% probability) and end up with $5000 of loss, but there is a 20% of chance you will come out breaking even, or not losing anything.  The choice is exactly the same as the previous example, but the situation is reversed…  $4000 loss right now or $5000 possible loss in the gambling scenario with a small chance of breaking even, what would you choose now?

Interestingly enough, 80% of people would choose the gambling scenario, even though both examples are exactly the same in nature.  If this question was posed to a computer, or Artificial Intelligence, we should get exactlythe same answer, because 80% odds in the gambling scenario pretty much makes it the right choice in Example 1 and the wrong choice in Example 2.  But strangely,  80% of us normal Forex traders will always choose the WRONG answer, every time.

It all comes down to this one thing, and that is the pain or losing outweighs the pleasure of winning.  If you find a $20 bill on the ground, you’d probably not frame it on the wall, but you’d spend it without thinking twice.  But if Bob owes you $20, you’d probably remember that forever, and that’s human nature…  So when it comes to trading, one’d rather take the gambling scenario and let the losses run because there is that fairy tale kind of chance for the market to turn around, or to delay the pain of losing… but more often than not, you’ll end up losing more…

Understanding your own mindset is important, and the next time you find yourself thinking about the gambling scenario, do yourself a favor and cut your losses short, because it only takes one huge loss to undo what you’ve worked for so long…

-Henry Liu

About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

You can find more information about me on my Google Profile.

Comments

  1. Hi Henry,have to agree that in general human nature will say to you ‘don’t take the loss’…but when you have the power to do that, then you’re there for another day. 🙂

  2. Hi Henry, I am having a problem logging in the member area, already wrote to your support people and nobody gets back to me until now. Sorry for posting this matter here.

    • Your account is under Plimus review. Please check your email as Plimus should be contacting you on this. Our hands are tied in this matter. Please respond to Plimus Email and requests. I suggest you open a ticket by sending an email to our support desk.

  3. We’re our own worst enemy! This is why I’m so attracted to your trading style. Thanks Henry.

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