Learning to Stop Trading

We talk a lot in the trading world about when to trade; we talk about entries and exits and profit targets and stop losses and moving average crossovers.  There are endless threads on massive online discussion boards about trading the news, or whether inside price action “Wicked Fairy” candles are better than “Samurai Warrior Face” inside bars.  The arguments about the best place to get into a trade are so extensive that, by now, it’s difficult to tell the difference between the methods.

But we don’t talk enough about when it’s time to quit.

I found that learrning when to stop trading was just as difficult — or maybe more difficult — than knowing when to take a trade in the first place.  For me, one of the real breakthroughs in my trading was when I realized that I didn’t have to trade, that not every day (or every hour) was suitable for trading, and a day off could be just as valuable as a day spent staring at the dual-screen setup.

The fact that the currency markets are open nearly 24 hours a day for 5.5 days per week — and that a holiday in one country doesn’t necessarily shut down trading for the rest of the world — makes it very tempting to open up the trading platform at nearly any time of the day.

 You’ve certainly got to make your own decisions about what’s right for you in your trading, but here are some ideas about why it’s a good idea to stop, or when the right time might be.

Stopping when you’re losing money

This is probably the hardest thing to do, and I’ve seen hundreds of traders lose more money than they ever thought they could, or wanted to, because they just simply couldn’t stop trading when the chips were down.

For example, when we’ve just lost money, we often react hyper-emotionally.  I know that when I have a losing trade (especially one that happens really quickly), I want the money back right away.  And that desire to get the money back right away leads to a nearly overpowering urge to trade again — now that I’ve seen where the market is really going (or at least that’s what I am thinking), I want to take advantage immediately.

If I can get that money back right away, then I don’t have to suffer any indignity that comes with a losing trade.

The truth is that we rarely recoup all those lost profits back in one big counter-trade, or one big “reaction” trade.  This can be the type of situation where we start spiraling out of control, taking trade after trade and losing a significant amount of money.

It’s sometimes just best to quit for a bit when we have lost.  This might be for an hour, for a day, even for a week or month.  This time away from the market can give us the space we need to think clearly and get ourselves in a productive state of mind again.

Stopping when we are hyper-emotional

One of the worst times to trade is  when we’ve had a distressing experience.  Ever made a trade after you’ve had an argument with your spouse or partner about money?  Or when you’ve had a particurarly tragic event in your life?

These can be terrible times to trade, because our focus is on the recent emotional experience, and not on what we’re doing.  When we’re not focused or attentive, we make stupid  mistakes that can cost us a lot of money.

I have seen emotional traders remove stop losses to “prove a point,” or get back at someone through their trading.  The trading becomes an expression of their emotions, or an outlet for feelings that they can’t say, or didn’t say, or can’t express in any other way.

The market, unfortunately, doesn’t know us personally and couldn’t care less about our individual difficult life experiences.  It’s not going to give us a break or go easy on us because we’ve had a bad day.

So if you’ve had a bad experience, consider taking some time to sort out your feelings before you fire up the trading account.

Stopping when we’ve made money

This might sound strange at first, but it can be one of the most powerful additions to your trading plan: a goal for when you are going to stop trading if you’ve made money.

Perhaps you set a goal to make 50 pips a week, or a month.  That’s a goal, mind  you, and I’m not implying that everyone or anyone can make 50 pips, or that the majority of traders can make that many pips (remember, trading forex is risky, and the majority of traders lose money — that’s a topic for another week) .  The fact is, I don’t know what the right number goal-wise is for you.  But if  you look back over your trading history, can you start to get a sense for what you are able to achieve, if you are a profitable trader?

I have seen traders, time after time, start the week off strong, and get to Tuesday or Wednesday with a reasonable amount of profit, only to see them lose the money in reckless trading during the rest of the week.

In fact, some of these traders consistently lose money week after week, even though early in the week — for most weeks — they are actually profitable.

We sometimes treat profits as “found money,” or money that we can afford to lose.  We have a few winning trades and then we give ourselves room to take an “experimental” trade, or a trade just for the hell of it.  This is tantamount to gambling.

Idea: go back in your account and see if you recognize a pattern of making money during the beginning of the day, week, or month.  Are you more successful at the start of the week or the end of the week?  In what ways are the trades you take different at the start of the day compared to the end of the day?  Or week? Or month?

Question: Does this mean that there’s never a good time to trade?
It sounds like it’s always time to stop!

Trading is not right for everyone.  And trading all the time is probably not right for many people at all.

But that doesn’t mean that stopping your trading before you start is a good idea. I’m not saying that there are never good times to trade.  Here are some thoughts:

1. Consider having some quiet time at the start of each day before you trade.  My friend Chris McCloughlin has a rule that he never trades unless he’s been awake for an hour — because he realizes (big surprise) that he doesn’t trade well if he is super tired.

2. Measure your emotional state.  This doesn’t have to be a sit-down with a professional therapist every time you are about to trade.  But it’s not so difficult to take a moment and gauge your own emotional state at the start of the day.  If you think you’re a complete wreck today, maybe it’s a better day to go feed the ducks.  Or see a movie.

3. Have a trading plan, and use it.  Make a version of your trading plan that you can keep near you, or keep you focused.  Not every trader needs to have the entire plan in plain sight, but most of us can benefit from a regular reminder of what kind of trades we’re looking for.  It’s important to allow yourself to be picky with your trades and wait for the setups that you know you like best.

4. Are you a better trader at a certain time?  When you go back through your trade history, do you recognize times that you are more successful?  It doesn’t have to be a time of day or day of the week; it could be near the time of some fundamental news.  It could be around the time when the currency pairs you watch consolidate in a specific pattern.  Recognizing when you do best as a trader can help you get more specific about when you are going to dedicate time to take and manage your trades.

Do you really need to do all this analysis, or all this thinking about stopping and starting  your trading?  Maybe that’s not your thing.  And it’s up to you how deep you go into efforts to learn more about yourself and your trading.  I’ve found it to be true  that this kind of deep thinking about what you’re doing pays personal dividends — regardless of how useful it is specifically to your trading.  I hope you’ll consider some of the things I’ve mentioned here.

Most of all, I invite you to keep in touch with me about this topic, and let me know what you’ve learned about the best times that you trade, or how you know when it’s time to stop trading.  We always love to hear from you, and the folks at IBFX are here to talk with you anytime.

Happy trading!

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