The most dangerous time to trade

There are times when the most profitable trading decision is to avoid trading altogether. One of these is just after scoring a big win on the Forex market, although many people continue to trade regardless. Big wins trigger an emotional response, which causes the trader to start seeing things that are not there and to get a feeling of supremacy over the markets. Fantasies develop and push traders to jump right back in without any rational reason to do so.

winnig trade

Invariably, such trades will end in losses. I’ve been a victim of this mindset and so what is written here is based on my personal experience and the lessons I’ve learned from such misadventures, which have happened at some point to almost every trader.

Why do traders mostly lose after big wins?

A winning trade is a powerful confidence booster. I recall days when I would win up to 300, 500, even 1,000 USD within minutes of trading the news. I remember the euro short in 2009 when then ECB Chief Jean-Claude Trichet made the statement: “I have no bias towards rates…” Earlier that week, I had read all the analysis on the ECB rate decision and statement to follow and one analyst from a major bank had actually predicted that the euro would likely suffer if Trichet made a statement similar to what he actually made later that week. The euro subsequently tanked, and just kept on tanking…it eventually shed 450 pips against the US dollar in the space of 2 days. I left my computer that Thursday with 2,250 USD raked in from that single trade and I felt on top of the world. By the time the weekend arrived, I had lost it all except for 320 USD.

What happened?

Diving into the market in an attempt to add to my big win without any rational basis for my subsequent trades proved to be my undoing. I started seeing setups that did not really exist, and even began to trade on “gut feelings”.

You see, my mistake mirrors the same pattern of mistakes that thousands of traders make all over the world. After a good win, a feeling of euphoria sets in. These feelings are actually due to the release of chemicals in the brain that modulate these feelings. For instance, the dopamine receptors in the brain trigger a release of dopamine after scoring a win in Forex. The danger is not in the feeling; it is natural and cannot be controlled. The real danger is in the fixation on, and eventual response to, that feeling.

New traders get caught in this web very easily. This is because such wins introduce a false sense of security that things will always go their way. They are never prepared for other market events that occur and which are not covered in any Forex material. Remember how the financial world woke up on the 22nd of January, 2008, to an unscheduled and unexpected change to interest rates by the US Federal Reserve? Traders who were in the green during the London trading session saw their positions unwind in a matter of seconds. It was unprecedented and came completely out of the blue. Such lessons only come from experience, which many new traders do not have. Rather, they are consumed by euphoria on the back of their winning trades to the point where they begin to see setups that don’t actually exist. 

One of the bad responses to such winnings is the tendency to overtrade. In an effort to chase the high and to recreate the situation that created it, traders tend to jump straight back into the market right after a winning trade. This is the same spirit that consumes gamblers in Vegas.  
While your repeated trading activity gives the brain its dopamine release, your subsequent trading results may not turn out the way you expect and the “high” you experience will turn into a very depressing low.

How to solve the problem

The first step is to realise that in the first place, you are in Forex to make a profit. Therefore, your trading trigger should be a well-orchestrated system that will serve as a filter for whatever you are doing on your Forex platform. If you understand this, you can go ahead to follow the steps listed below.

a) Have well-defined entry and exit parameters.
Your trading strategy should have well-defined entry and exit levels. Why are you entering the market? Why do you want to step out? If you cannot answer these two questions very clearly, simply walk away and do not trade.

b) Avoid short-term trades
Short-term trading techniques such as scalping make a trader particularly prone to knee-jerk reactions in response to the dopamine highs. Scalp trades rarely have a technical or fundamental basis for trade entries. Many scalpers simply get in and out of trades without any thorough analysis. Instead, learn to trade longer timeframes, such as the 4-hour or the daily. They offer not only larger profits for good trades, but good setups also take time to form on these charts. So, for those who have learnt to trade only with entry and exit filters, this serves as an automatic control mechanism. The following chart shows a symmetrical rectangle forming on the AUDUSD pair. Not only was this a high-probability setup that took 6 days to break, but the pattern wasn’t visible on lower time-frames at all.

symmetrical rectangle

c) Take a break
After a big win, you should seriously consider switching off your computer and going out to do something else with your time, at least until the dopamine-fuelled high wears off. There will always be excellent opportunities to make a profit on the market. So why not take a break from trading and wait for another good opportunity before you take the plunge?
d) Cut!
If you have already made the mistake of jumping into another trade soon after the first and that trade ends in a loss, stop trading at once! Just stop. Like film directors would say - cut!

Conclusion

The most dangerous time to trade is after a big win. Don’t get sucked into the markets in order to fuel your high. Rather, enjoy your time in other ways outside of the Forex market. You should only come back when the high wears off and you’re able to spot rational setups with a clear head. It takes practice to achieve control of those emotions, but the journey starts today.

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