Two psychological techniques to improve the entry and exit from the market

Two psychological techniques to improve the entry and exit from the market

Mental Accounting
Everybody knows about accounting. But not everyone heard about mental accounting. Lets speak about it today. We will discuss how it relates to trading and how to use it. Or, if I may say so, how to deceive your thinking in order to improve your trading.

Various theories based on the fact that people always act the most favorable way, do not work in practice. Really, people take irrational decisions. They buy expensive goods that they do not need. They miss favorable deals moments. They lose a lot of money many other methods. How is it possible?
Psychologists have found that people behave and make decisions differently. It depends on how they perceive this situation.
Here are a couple of examples. And then we select several moments useful for trading.

Example one: If in the store you pay cash, you perceive price as a higher and calculate the amount more accurately. But if you pay by card, you often spend more than allow yourself paying cash.

Example two: You buy a lottery ticket where probability of winning is 1: 1000 000. But at this point, you believe that you will get a jack pot. But if an insurance agent comes to you and offer insurance in case with the probability 1: 10000, now you are sure that this trouble will never happen to you, and usually you reject the proposal.

How this feature appears in trading? It’s very simple. As soon as we have decided that the market will go in a certain direction, we begin to see generally only those signals which correspond to our expectations. We reject other objective signals or just do not notice them because they do not suit our expectation. Thus we avoid a major objective information that is unpleasant.

When we buy, we pay more attention to the bullish candle and often simply do not notice bearish signals. We expect and wish that the market moves according to our initial estimate. For information that the market turned against us, we usually just ignore. In other words, because of this mental mechanism, we tend to stay in a losing trade longer than necessary.

Now when we are aware of this trend our psyche to deceive us, it’s time to think about what to do to get an objective
look at the movement of the market.

Get a new perspective on the market entry.
Trader Adam Grimes wrote on his blog that one little secret had very positive impact on his trading results. He also said about existence of mental accounting, which he called stubbornness that affects almost all traders. Sometimes you need more courage and self-control to get in the market. Sometimes entering the market is preceded by hard work and multiple analysis to check it out and play it safe. But what will we do if there is information that does not meet our expectations? Sometimes the shock of understanding the fact that our position is unprofitable may cause stupor, which eventually will lead to catastrophically consequences.

Perhaps the promised little secret will sound too simple, but it is really very important. Simply put, that entering into market, always expect that there will be losses. Without that, how much work was done during the preparation of the transaction, how many factors show success of the transaction or how good were the conditions of entry, always expect that this position will be unprofitable. This way you will achieve a significant change in your perception. Instead of rejection signals which indicate that the market turns against you, now you will be more open
and are able to identify information that the market does not go in the direction you want. Now for you, it is not difficult to take this fact, because you suppose such situation from the beginning. If on the contrary it turns out that the deal is profitable well it will be as a pleasant surprise. Change your thinking in this direction and you will become less trapped in a losing trade. On the contrary, you begin to do what is necessary. For example, if the market
is not going in the right direction for a long time, you close position and wait for a better opportunity.

One more small correction to the topic of confidence in trading. It is very important, but I mean different form of trust. You have to trust your system and be sure that after a sufficient number of deals, you will be in profit. But just as important to be able to separate this knowledge from result of any individual deal. After all, each individual deal has the same chance of profit as a coin toss. Use this information and see how it will affect your results.

Change the view of the exit from the deal.

A major work is position management and exit. Think about how many books were written about the analysis, market signals, techniques of trading. And in how many of them is written something referred to the deal management? Throughout most attention is paid to the opening of the deal, and in fact no less value for profit has management of an open position.

You can try one exercise to manage the deal. This includes a few things: limiting risk, partial profit (or loss), opening additional positions or closing all open positions if you are loosing profit. All of this is serious difficulties, especially for beginners. Because it is associated with different emotions. The solution is to focus only on the exit.
Many professional traders work in a team and some of them give this very important. Group of traders tried
the following method: to work in pairs and when one trader finds a suitable opportunity and open positions, his partner was responsible for closing of this position.

It often happens that a trader before opening position analyzed situation for a long time. And when at last he
open it, he attaches great importance to signals in favor of the deal, not wanting to notice the obvious signs of a losing. If a trader is responsible only for the closing of the transaction, he is not susceptible to the emotions of attachment to the transaction and can objectively evaluate situation. In this case it is much easier to perceive that market shows.

The well-known trader Linda Rashke says about the importance of having an exit strategy prepared before the start of the working day. It makes sense – as long as you are not trading, your decisions are not subject to biases.

Group Experiment

Linda Raschke and Andrew Lo prepared an experiment in which the whole group had to open positions for which they indicate. Opening positions was required, without consulting the participants about the reliability of the deal. After opening a position, everyone had to take over control deal as they thought was right. Sometimes it meant instant closing position with a small loss. Participants were very surprised at considerable profit, despite the fact that all positions have been chosen by accident. The conclusion: trade management and closing it are perhaps more important than the opening.

How to get a new skill

Since we are talking about psychology, train thinking better on demo account. But for more efficiency it is recommended to train on real cent account. That is the minimum you need to risk that you are ready to spend on your training.

Choose the currency pair that is the most familiar to you. Read economic calendar and follow the fundamental news that could affect the behavior of the market. Work with minimum amount, but on a real account. The goal is not to tickle your nerves, but to check what emotions accompany risk real money. Random transactions generate this way: Draw two column, in the first note whether or not enter the market. In the second to buy or to sell. You can do it every hour. But if you prefer to work on the daily charts, it is sufficient to once a day. This technique may help determine how often you want to trade, and eventually develop a system by which to trade.
For example you want to control the market every hour and open two deals per day. You can even throw the dice when the point is 1 or 2, you open trade. The decision to buy or sell can take tossing a coin: heads – buy, tails – selling.
Mandatory rule – open trade immediately, without hesitation. Without thinking, without analyzing. Even if you want to close trade immediately, still open it. If you decide to keep trade open, then manage it carefully.

This is really an important exercise. Invest in it some of your time for a few weeks or even months
the results will surprise you.

Remember that the purpose of this exercise – get rid of all the emotions associated with the search for trades and opening them.
You can not feel any kind of affection or emotion to trade you have opened on the basis of throwing dice and coins. And therefore you can focus exclusively on managing the position and its closing. Because of this, you learn to respond to what market shows you.

Finally

I hope that the proposed unusual approach to trading psychology will reveal new horizons and help you change your view on the forex.
There is mental accounting, and it is useful to remember about it every day, even in ordinary situations.
As said Mark Douglas, famous psychologist dealing with trading “on the forex you can see only what you learned to see” And in order to get rid of restrictions that prevent you to see a lot on forex, we offer you this training.

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