The Virtue of Time Based-Exits
While trading is, at least as a concept anyway, very simple in practice, most retail traders find that their emotions get the better of them, and they inevitably end up losing. In fact, the majority of small retail Forex traders lose money, and I believe the inability to manage one’s own emotions is probably the single biggest reason for this.
Prices are not random
The reason why emotions tend to cause retail traders to lose is because in the Foreign Exchange market what feels like the right thing to do is most likely the wrong thing to do, and this is particularly true when it comes to exiting a trade. If prices on the Foreign Exchange market were completely random, then nobody could make money from Forex trading; however, currency prices are not random, they trend. These trends can last for hours, days and sometimes for moths.
Theory and Practice can be very different
The way to make money from a trend is very simple in theory and very difficult in practice. In theory, all one has to do is detect the direction of the long-term trend, enter in that direction and wait until the market to take them into profit. If the trade is good, and they make a profit, then they should leave the trade to grow and grow until they get a signal that the trend has reversed, and if a profit target it used it should be far larger than the stop loss. And of course, if a bad trade is entered, then it will be stopped out. The problem is that while this sounds good in theory at least, in practice most traders will feel the urge to grab a small profit when it first appears and feel the urge to leave a losing trade open in the hope that it will turn around. This emotional form of trading of course leads to traders failing to maximize a good trade and results in bad trades being left to grow and grow getting worse and worse until ones entire trading capital is lost.
I have seen this pattern repeatedly with failed traders and their accounts. These traders tend to have a string of very small wins followed by a big loss that they never recover from. And after several of these losses, their accounts are wiped out.
You need to have a plan
One way that Forex beginners can learn to stick to their trading plans is to have a plan that is easy to follow, and something that is particularly easy to follow is to exit trades with time-based exits. With a time-based exit, a trader can forget about a trade once they have placed it. A trade placed with a time-based exit will either be stopped out if it is a bad trade, or be timed out. If your entry has an edge, then a time-based exit should produce more winning trades than losing trades with the average size of a winning trade being larger than the size of the average loser. If you are a Forex trader and have not had much success trading, and my observations about why most traders lose rings true to you, then I recommend trying time based exits as it is much easier emotionally if you can simply forget about a trade once it has been placed.
If you are interested in reading more about Forex trading strategies that are easy for beginners to follow a place to start might be my article on Forex trading strategies for beginners on my blog.
Thanks for reading, David.