Learning to stop trading: an introduction

We talk a lot in the trading world about when to trade; we talk about entries and exits and profit targets and stop losses and moving average crossovers. There are endless threads on massive online discussion boards about trading the news, or whether inside price action “Wicked Fairy” candles are better than “Samurai Warrior Face” inside bars. The arguments about the best place to get into a trade are so extensive that, by now, it’s difficult to tell the difference between the methods.
But we don’t talk enough about when it’s time to quit.
I found that learrning when to stop trading was just as difficult — or maybe more difficult — than knowing when to take a trade in the first place. For me, one of the real breakthroughs in my trading was when I realized that I didn’t have to trade, that not every day (or every hour) was suitable for trading, and a day off could be just as valuable as a day spent staring at the dual-screen setup.
The fact that the currency markets are open nearly 24 hours a day for 5.5 days per week — and that a holiday in one country doesn’t necessarily shut down trading for the rest of the world — makes it very tempting to open up the trading platform at nearly any time of the day.
You’ve certainly got to make your own decisions about what’s right for you in your trading, but here are some ideas about why it’s a good idea to stop, or when the right time might be.

Stopping when you’re losing money

This is probably the hardest thing to do, and I’ve seen hundreds of traders lose more money than they ever thought they could, or wanted to, because they just simply couldn’t stop trading when the chips were down.
For example, when we’ve just lost money, we often react hyper-emotionally. I know that when I have a losing trade (especially one that happens really quickly), I want the money back right away. And that desire to get the money back right away leads to a nearly overpowering urge to trade again — now that I’ve seen where the market is really going (or at least that’s what I am thinking), I want to take advantage immediately.
If I can get that money back right away, then I don’t have to suffer any indignity that comes with a losing trade.
The truth is that we rarely recoup all those lost profits back in one big counter-trade, or one big “reaction” trade. This can be the type of situation where we start spiraling out of control, taking trade after trade and losing a significant amount of money.
It’s sometimes just best to quit for a bit when we have lost. This might be for an hour, for a day, even for a week or month. This time away from the market can give us the space we need to think clearly and get ourselves in a productive state of mind again.

Stopping when we are hyper-emotional

One of the worst times to trade is when we’ve had a distressing experience. Ever made a trade after you’ve had an argument with your spouse or partner about money? Or when you’ve had a particurarly tragic event in your life?
These can be terrible times to trade, because our focus is on the recent emotional experience, and not on what we’re doing. When we’re not focused or attentive, we make stupid mistakes that can cost us a lot of money.
I have seen emotional traders remove stop losses to “prove a point,” or get back at someone through their trading. The trading becomes an expression of their emotions, or an outlet for feelings that they can’t say, or didn’t say, or can’t express in any other way.
The market, unfortunately, doesn’t know us personally and couldn’t care less about our individual difficult life experiences. It’s not going to give us a break or go easy on us because we’ve had a bad day.
So if you’ve had a bad experience, consider taking some time to sort out your feelings before you fire up the trading account.

Stopping when we’ve made money

This might sound strange at first, but it can be one of the most powerful additions to your trading plan: a goal for when you are going to stop trading if you’ve made money.
Perhaps you set a goal to make 50 pips a week, or a month. That’s a goal, mind you, and I’m not implying that everyone or anyone can make 50 pips, or that the majority of traders can make that many pips (remember, trading forex is risky, and the majority of traders lose money — that’s a topic for another week) . The fact is, I don’t know what the right number goal-wise is for you. But if you look back over your trading history, can you start to get a sense for what you are able to achieve, if you are a profitable trader?
I have seen traders, time after time, start the week off strong, and get to Tuesday or Wednesday with a reasonable amount of profit, only to see them lose the money in reckless trading during the rest of the week.
In fact, some of these traders consistently lose money week after week, even though early in the week — for most weeks — they are actually profitable.
We sometimes treat profits as “found money,” or money that we can afford to lose. We have a few winning trades and then we give ourselves room to take an “experimental” trade, or a trade just for the hell of it. This is tantamount to gambling.
Idea: go back in your account and see if you recognize a pattern of making money during the beginning of the day, week, or month. Are you more successful at the start of the week or the end of the week? In what ways are the trades you take different at the start of the day compared to the end of the day? Or week? Or month?

Question: Does this mean that there’s never a good time to trade?
It sounds like it’s always time to stop!

Trading is not right for everyone. And trading all the time is probably not right for many people at all.
But that doesn’t mean that stopping your trading before you start is a good idea. I’m not saying that there are never good times to trade. Here are some thoughts:
1. Consider having some quiet time at the start of each day before you trade. My friend Chris McCloughlin has a rule that he never trades unless he’s been awake for an hour — because he realizes (big surprise) that he doesn’t trade well if he is super tired.

2. Measure your emotional state. This doesn’t have to be a sit-down with a professional therapist every time you are about to trade. But it’s not so difficult to take a moment and gauge your own emotional state at the start of the day. If you think you’re a complete wreck today, maybe it’s a better day to go feed the ducks. Or see a movie.

3. Have a trading plan, and use it. Make a version of your trading plan that you can keep near you, or keep you focused. Not every trader needs to have the entire plan in plain sight, but most of us can benefit from a regular reminder of what kind of trades we’re looking for. It’s important to allow yourself to be picky with your trades and wait for the setups that you know you like best.

4. Are you a better trader at a certain time? When you go back through your trade history, do you recognize times that you are more successful? It doesn’t have to be a time of day or day of the week; it could be near the time of some fundamental news. It could be around the time when the currency pairs you watch consolidate in a specific pattern. Recognizing when you do best as a trader can help you get more specific about when you are going to dedicate time to take and manage your trades.

Do you really need to do all this analysis, or all this thinking about stopping and starting your trading? Maybe that’s not your thing. And it’s up to you how deep you go into efforts to learn more about yourself and your trading. I’ve found it to be true that this kind of deep thinking about what you’re doing pays personal dividends — regardless of how useful it is specifically to your trading. I hope you’ll consider some of the things I’ve mentioned here.
Most of all, I invite you to keep in touch with me about this topic, and let me know what you’ve learned about the best times that you trade, or how you know when it’s time to stop trading. We always love to hear from you, and the folks at IBFX are here to talk with you anytime.

Happy trading!
By Rob Booker

Have you ever said to yourself, “Well, going long (or short) the EUR/USD looked good at the time I took the trade!”

Perhaps you’ve had an experience where for the past several weeks, you’ve been haplessly watching a poor little EUR/USD trade spiral out of control to the point where you can hardly contain pulling your hair out by the roots. You’ve witnessed this innocent little trade morph into a horrifying beast which you are now referring to as the “drawdown monster.”
We’ve all been there, haven’t we? Paralyzed by fear or — if you’re anything like me sometimes — just stubbornly unwilling to admit defeat and close the darn trade. It’s a difficult thing to confess when we’re wrong, but at what point do we say enough is enough?
So, the question is simply this—what should my next move be? How long should I hang onto this trade that just seems to be going from bad to worse to absolute train wreck? Should I cut my losses and consider it a painful lesson learned or do I hang on to this bad boy and hope it comes back? Stranger things have happened, right?
Well, let’s put something into perspective.

Losing Money
Let’s say I have $10,000 in my margin account and I lose $5,000. My drawdown in this case would be 50 percent. Now, what percentage of that $5,000 would I have to make in order to get back my original $10,000? 50 percent, right? Wrong! I would have to make back 100 percent of my $5,000 to get back to my original $10,000!
The point of this harrowing example is this—it’s very easy to lose money and a whole lot harder to get it back.
“But Rob, I would never lose 50% of my account in one trade.” For your sake, I certainly hope not. But for the sake of argument, let’s just say you do. How on earth do you get yourself out of this pickle?
Perhaps this question is best answered through the sad and forlorn tale of my good friend and currency trader, Shasty McButterknuckle, who is actually the alter-ego personality of a member of the marketing department at IBFX.
Shasty has a heart as good as his intentions, but he perpetuates three tendencies that seem to get him in trouble and constantly keep him in the red:

Tendency #1—A little thing called pride!

Shasty has a penchant for hanging on to trades for nothing more than his heightened sense of ego. He is so committed to proving that his original decision was right that he’s willing to stubbornly cling to it until the very end. And interestingly enough, the more pips he loses, the more convinced he is that his original premise was justifiable. Shasty holds on to losers in an effort to prove that he was right—both in his own eyes and in the eyes of others.
Solution: There should ALWAYS be a reason for your trading moves. A decision based on ego will inevitably come back to haunt you. A trader who fails to maintain a strict trading plan won’t know where to exit a trade or how much money he could make or lose. This “fly by the seat of your pants” style trading more often than not leads to disappointment and frustration.

Tendency #2—Adding to losing positions

Shasty sometimes not only holds on to a losing trade but also actually adds positions to it, rationalizing that his targets will be hit when the currency changes direction. Of course, this method is super-terrific if the currency does, indeed, change direction, but if it doesn’t and he maintains that losing position, it simply hastens the painful demise of that poor little trade.
Solution: Adding to losing positions in order to “save yourself” is an entirely different ballgame than doing so because it’s a valid part of your trading strategy. If a trader is adding positions for the right reason, the key to remaining competitive lies squarely within his psychological ability to ride out a big drawdown—a feat that should never be taken lightly—and then allowing the trade to reach its maximum potential.

Tendency #3—Loyalty

Perhaps Shasty’s biggest downfall is his undying love and commitment to a particular currency pair. In this case, his strength is also his weakness. His sense of loyalty holds him back from making sound, educated trading decisions.
Solution: Fundamentally speaking, your feelings about a given currency pair don’t mean squat. The key to remaining competitive in Forex trading is allowing the market to tell you about the currency and then pouncing, not vice versa. Give more weight to what is happening in the market than to your attachment to the pair.
So, we find ourselves back at the beginning—Riding a losing trade and wondering what to do next.
A dear friend once told me, “Wise people learn from their own mistakes, but super wise people learn from the mistakes of others.” So what can we learn here? Firstly, don’t trade like Shasty! Be ye not so foolish. Learn from his mistakes and your margin account will thank you.

Secondly, take heed to these sound trading principles:

° Grasp a bigger picture perspective on the market. Before you begin trading for the day, have a look at the weekly and/or monthly chart. They can often provide you a broader perspective of a particular currency pair.
° Accept responsibility for your own actions. When you have a losing trade, don’t look for others to blame. You made the decision to place the trade. You control your trading destiny. You and you alone.
° Maintain a strict adherence to sound money management. Buying into the “get rich quick” scheme of Forex trading has left countless numbers of traders with dwindled margin accounts. Manage your assets well and you will be a much happier—and much more competitive—currency trader.

We’re experiencing a once-in-a-decade event in the Forex market, my friends, and it isn’t going away anytime soon. An extraordinary confluence of events has thrown nearly every financial market into chaos and, sadly, Forex was not immune. I’m reminded of a rather macabre but ever so appropriate phrase I once heard that went a little something like this—adapt or die.

Drawdown is a painful reality in Forex trading and despite how much you punch, kick, and fight, it will undoubtedly happen to you at some point. It’s up to you to decide how you’ll handle it. It can make you angry and vengeful or it can make you wiser and more disciplined. I can’t speak for you but I most certainly prefer the latter.
As fellow currency traders, we always welcome your thoughts, comments and questions. We’re always here to help.
Happy trading!
by Corbin Layton and Rob Booke

Directional Bias:
Nearer Term –Bearish
Short Term –Bearish
Medium Term –Bearish

Weekly Range:
High -1.3298
Low -1.2330

Eur/Usd Loss of momentum at the 1.3298 level leaves euro aiming for a recapture of its YTD low

TheLFB Nov 03 08 EuroAlthough a first weekly higher close occurred the past week since EUR tumbled off its Sept 22’08 high at 1.4867 to hit a low of 1.2330 on Oct 28’08,that strength waned Thursday and Friday ahead of the 1.3259 level(Oct 10’08 low) pushing the pair to as low as 1.2668. This is coming on the back of a failure at 1.3298 and subsequent hammer candle pattern (top reversal signal) formation. We maintain that the pair’s corrective recovery started at the 1.2330 level has halted and opened up downside weakness back towards its YTD low at 1.2330. A clearance of the latter is now envisaged to trigger its medium term decline towards the 1.2134 level, its .50 Ret (its 0.8231-1.6038 high, monthly chart) followed by the 1.1827 level, its Mar’06 low and then its Nov’05 low at 1.1640.Longer term charts remain supportive of this view.

Resistance levels are located at the 1.2728 level, its Oct 22’08 low and the 1.3005/58 area, its Oct 23’08 high/.618 Ret (0.8231-1.6038 rally, monthly chart) with a break through there targeting the 1.3259/98 level, its Oct 10’08 low/Oct 30’08 high. On the whole, having reversed its corrective recovery off the 1.2330 level, risk of a decline retargeting that level and beyond is now expected.

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