Most of us perceive that keeping a cool head in the midst of a large drawdown is the key to becoming consistently profitable.
Keeping track of your forex trading performance and emotions when you’re winning is just as important. You wouldn’t want to lose your mojo while you’re on a winning streak, would you?
If you answered “NO,” then you better watch for signs of being overconfident. See, there’s nothing like a string of winners to make a trader feel like he or she can’t make mistakes.
Overconfidence is usually characterized by an exaggerated belief in one’s own trading skills.
Now, don’t get me wrong. Confidence is critical in becoming a successful forex trader.
However, it’s one thing to believe that your trades can reel you in a handful of pips and it’s another to think that you know everything about the markets and that there’s no way for you to lose.
Overconfident traders usually get in trouble by trading larger position sizes than they’re used to, jumping in again in the same direction after getting stopped out, or overtrading.
If that just hit a nerve, don’t worry. You’re not the only one guilty of being overconfident. So how do you keep yourself from doing so? Here are a few suggestions:
1. Critique your own trade ideas.
You should ask yourself, “What forex factors can invalidate my trade idea?” or “What will I do when my trade goes against me?” From there, consider a few contingency plans.
Through this exercise of making yourself aware that your seemingly-fail-proof trade setups can still end up as losers, you become more careful in managing your trade.
2. Implement your entry rules.
As mentioned above, overtrading is one of the signs of overconfidence. Check your trading plan before you enter a trade.
Does price action meet your entry criteria? If not, don’t just jump in because you have this “gut feeling” that that setup is gonna end up as a winner like your previous trades.
3. Limit your losses.
Just like how you would set a maximum drawdown stop whenever you’re in a losing streak, setting a cap for your losses is also as important as when you’re on a roll.
When you start losing after winning a few trades in a row, there’s a tendency for you to tell yourself that it’s okay because you still have a lot of money anyway. However, the danger is that you may become lenient with your execution performance.
If you’re not careful, you might end up giving yourself a free pass on one loss after another. And before you know it, bam! You’ve already lost all your gains!
So be sure to determine how much of your winnings you are willing to lose.
Let’s say you have already lost half of your most recent 3% gain, you may already want to take a little time off forex trading, re-consider your approach, and examine what you’ve been doing differently.
Ultimately, it all goes back to your forex trading plan. The best way to keep yourself from being overconfident is to establish a detailed trading plan and STICK TO IT!
Winning feels good, I know. Most of the time, it makes us feel like we’re invincible; that we can get away with a win on every trade. However, once you start to have this kind of thinking, that’s when you become most vulnerable to careless trading and your profits could evaporate in an instant.
Keep in mind that your goal as a trader is to become consistently profitable. So build on your wins by keeping your ego in check!
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