Forex Learning: Do You Know the Main Error in Trading?
How to learn Forex – This is the reality: to be a successful trader is rarely achieved in a short and direct time. Usually a trader will face a bad thing in trading and it will be a valuable teacher and experience.
Some traders will even experience the most bitter things in trading. For example, until the capital is used up. However, that does not mean that to be a successful trader must be sick first, but more importantly we can learn from mistakes. There is an interesting expression from the book ” Reminiscences of a Stock Operator ” namely:
” There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, again and again. This is because human nature does not change – Jesse Livermore
What is about to mean, in the exchange or the trading world there is actually nothing new, what happened in the past will happen again now and so on. This is because human behavior does not change.
So that means that the problems faced by every trader at this time are actually the same as the problems faced by traders in the past both 10, 20 or 100 years before. The reason is quite simple – apart from the factors of technological progress and innovation – we remain as humans who have emotions. The only difference is our emotions that can be a barrier for us to make the right decisions.
The biggest mistake
Before I mention the biggest mistakes in trading that we do, try to recall what bitter experiences you experienced when trading? He … he … I know, trying to remember or open old wounds is very painful, but few of us want to learn from the mistakes we have made. Citing the old saying: “experience is the most valuable teacher.”
Why is the trading that we do is always wrong, not the profit we get but the loss we get, answer the following questions:
- Do you have a trading plan?
- If you have, do you often violate the trading plan that you have arranged?
- Do you let the price move not in the direction of your position and you leave it without any anticipation?
- Do you set limits on your losses?
- Do you know when to close a position?
If the number one answer is “No”, then you have made the first mistake; if the answer is number two “Yes” then you have made a second mistake; if the answer is number three “Yes” then you have made a third mistake, if the answer number four is “No” then you have made a fourth mistake; if the number five answer is “No” then you make the fifth mistake.
All of the above questions will eventually converge into one of the main reasons that traders often do. When you feel you have made no mistake from the five questions above, there is still one reason why in total we still experience losses. The main mistake we make is that we do not understand the concept of risk reward ratio.
Like the expression Jesse Livermore above where we are only human, and human nature must always want to win or if trading always wants profit, no one wants to suffer losses.
Well … this is where emotionally driven human nature always wants profit sometimes forgetting logic and making wrong decisions. This means that even though we often benefit compared to the number of transactions we have lost, why is our total capital still decreasing?
Pay attention to the following picture:
Like I said above, human nature always wants profit, like the picture above if we look at the percentage of the number of trades that profit (the blue bar) is greater than the number of trading losses (red bars) in almost all currencies. Then the question that arises isn’t that it means good and we feel happy, right?
But unfortunately, from the picture shown above, the percentage of profit that is greater than the loss does not guarantee that we will profit or our capital will increase. How come like that?
This is because of the risk factor and reward ratio, the risk reward ratio is the ratio between how much loss and the profit we want to get. Well, think about it in your heart. When you trade and the price moves not in the direction you are taking, will you hold the wrong position in the hope that the price will turn back? This is quite greedy, even though the truth is we shouldn’t be afraid?
Or if the case is reversed: that is, when the position you take is correct and the price moves in the same direction as the position we took, will you immediately close the position for fear that the price will turn back?
The point is that the habit that we often do when floating minus will we hold it, but when floating profit we rush to close the position, right?
Back to the concept of risk reward ratio. To better understand risk and reward, consider the illustration below:
- A Trader A from 10 transactions 7 profit transactions and 3 loss transactions, if we look at a glance, trader A is cool isn’t it. But the trader A sets a risk reward ratio of 5: 1 , for example the profit target is only 10 pips, the limit is 50 pips.
Then the Trader A profit is 70 pips (7 x 10 pips) while the loss is experienced – 150 pips (3 x 50 pips), so the trader A totally still loses 80 pips (70 pips – 150 pips).
- A trader B of 10 transactions 4 times profit while 6 times loss, if we look at a glance this trader B is worse than trader A is not. But trader B sets the risk and reward ratio reversed which is 1: 5 , so for example the profit target is 50 pips, the limit of the risk is only 10 pips.
Then Trader B profit is 200 pips (4 x 50 pips) while loss is only minus 60 (6 x 10 pips), so overall trader B still profits 140 pips (200 pips – 60 pips).
So actually the essence of trading is not how often we profit, but more important is how much profit we get when our position is right and how small the loss we experience when our position is wrong. Practice continuing to use demo accounts.
Plan your trade, and trade your plan.