Trading decisions and emotion

Question

I know you get to trade all day. My question refers to those who can’t necessarily be in front of the screen during new releases. Today I exited a short trade GBP/USD at 1.6930 for 25 pips because I knew the Non Farm Payroll was due to release while I wasn’t going to be home. Now I see the pair down for an additional 45pips. If you were in my shoes
what would you have done differently?

Answer

Hi – first of all many congratulations on taking some pips under very difficult and challenging market conditions, and I can assure that you should be very pleased with yourself, particularly as you are relatively new to the forex world. Taking 25 pips is an excellent result, and one which many traders would envy.

Thank you also for sending through the details of the 25 pips from a short GBPUSD, and I will do my best to answer your questions regarding what I would have done in similar circumstances. In addition your question really gets to the heart of one of the biggest issues we face as traders, namely the vexed question of when to exit a position. In many ways getting into a trade is the easy part. This decision is usually clear cut and taken in a non emotional environment where we have nothing at risk and are simply assessing market conditions and looking at our indicators, or methodology to send us a clear signal. In other words our brain is in an analytical mode.

As soon as we hit the buy or sell button our brains flips to an emotional state, driven in equal measure by fear or greed, depending on the direction of the trade. Managing these emotions is immensely difficult, and indeed the hardest aspect of all is to stay calm when a potential profit begins to ebb away. The emotions go something like this. We enter the market, full of hope and the position moves in our favour, and we begin to see the ‘dollars’ increasing in our account. We are delighted and particularly proud and pleased with ourselves that we have made the right decision. At which point the market then starts to reverse and pull against us, and we begin to watch in mounting horror as all that lovely profit begins to fall away and the trade moves back towards zero. At this point, perhaps we close out, grateful to have avoided a loss and may even come out at a small profit. What then happens is the market continues on its original path and we are left, regretting our emotional decision to exit as we calculate the profit we could have taken, as we ask ourselves the inevitable questions : ‘why did I close out or why did I not stay in’.

Trader regret can be very corrosive to your confidence, and in addition the issue of staying in a position to maximize a profit is a perennial one. There is no easy solution and we all have to make a decision based on the chart and market conditions at the time, as to when to exit. However, one of the great advantages of using the volume price analysis method is that, not only does it tell you when to get in, but it will also help to keep you in for the longer term. After all, if the market is rising and the volume is falling then this is not a strong signal that the move is likely to run very far, and is therefore running out of steam. To take a further example, and again to the long side, you have entered and the market has risen nicely but then starts to pause or reverse. If you see the reversal is occurring on diminishing volume then you can be confident that it is simply a pause or pullback, and not a reversal in trend and then you should not be ‘spooked’ into closing. Equally, you can also use your indicators in the same way, particularly the currency strength indicator. After all if it was good enough to get you in then it will also tell you when a currency has moved from one extreme to another, and is therefore possibly time to close out.

Furthermore, another major benefit of volume price analysis is that it forces your brain into an analytical state and away from the emotional state by giving you those few seconds to assess the market price action calmly and clearly, and stop you reacting from fear or greed.

Finally, on what I would have done. I would have probably done much the same as you with the only caveat being the bullish sentiment that is now evident for the US dollar. However, this is with hindsight and your decision to exit ahead of the news is certainly correct and once again a decision every trader has to make which will also be reflected in the stop loss positioning and your risk and money management rules. I hope the above helps & thank you for sending me such an interesting and thought provoking question.

By Anna Coulling

About Anna 1027 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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