Binary Options Psychology Training: Chasing Losses
While waiting for an entry or an expiration time, your mind can play nasty tricks with you. Every experienced trader must know that emotions can ruin a nice play or setup. You may have studied and tested a system for a year or longer and have great results in demo mode, but now it’s time to do the real thing. Now it’s your money at stake and now your mind starts playing games. In these articles, I want to point at some common mindgames that can ruin your day and trading account.
You open the first trades according to your system with great enthusiasm. You’re going to win and prove everybody that it works out for you. Maybe you’ll even make a flying start and manage to win several trades. But then you run into a situation where everything seems to go wrong and pressure starts to rise. Like a poker player that loses with aces for the third time in a row, you start to doubt your system or judgment, and maybe even think ‘the dealer plays a dirty game’. A sudden move can turn a winning trade in a lost trade in the last second and price of your broker may differ a little from your MT4 charts, since they use their own pricing.
Chasing losses in emotional trading is the most common mistake in trading and it’s not only beginners who make this mistake. Even experienced traders can feel the pressure and it’s only discipline and trust that can save you from these losses. It’s hard to admit you simply lost a decent amount of money, even if it’s normal in your system to have some downswings.
Poker players call this state of mind ‘Tilt’. You’re off balance and make emotional decisions, instead of disciplined ones. Sometimes it even may work and you get back on track, but it’s a sure way to devastating losses in the end. Especially if it did work sometimes and you really won back your money, it only confirms to you that this is the way to go – until you hit the wall and blow up your account. Then shame and blame come in and chaos is complete.
What’s chasing losses?
You are chasing losses when you try to recover from losses by force, losing grip on your trade behavior. You get into an emotional state of mind, urging you to get your money back as soon as possible, instead of working your way back up by disciplined trading and analyzing possible mistakes.
Chasing losses can be done in several ways. You may decide to open trades that don’t have a complete or good setup and in fact gamble with your trade money. Or maybe you keep to your system, but raise the trade size to a height that is asking for trouble (progression). Some people even put in their complete trading account on one trade to get their money back.
Why Chasing Losses is Bad News
Trading incomplete setups or with a higher and higher part of your trade account, may ruin you even with a wonderful system, without a better chance of winning. Taking more, but lower quality trades may worsen your problem, since your ITM percentage also will be lower, so variance will grow and thus your possible losing streaks. It may seems logical that winning back your money with higher trade sizes must give you better chances of restoring your account (you can’t lose them all, can you?), but your chance of getting ‘In the money’ is not growing together with your trade size. It stays the same and you only risk more money for the same chance of winning a trade.
One of these progressions is called the ‘Martingale’ (doubling up your trade size when losing, until your losses are covered). Many system sellers use this to prove they have a winning system and it may work for a while, but it ends nearly always with that moment you blow up your account. There are thousands of progression systems, mostly coming from the roulette world, but none of them give you a better chance of winning your trade. A small progression doesn’t have to be a mistake, but you should realize that your chance of going ITM doesn’t grow and using a steady percentage of your trade account gives you the most solid results in the end.
Depending on your system, your tilt resistance and account size, your trades should be between 1-5% of your account size to have a solid money management. Losing a few % of your account doesn’t hurt that much, but losing 15% may cause you to make panic moves and worsen the situation.
How to Recover from Losses
Instead of chasing losses, you should take a look at your trading first. Did you make mistakes? Forgot to check for news events or higher time frames? Draw your conclusions and get your mind clear. If you’re getting out of control, then walk away and go shopping or fishing and call it a day. The market will be there tomorrow again.
You could also try to take lesser, but higher quality trades, especially if your account has been damaged severe. It will restore your confidence in your trading and also restore your account. Maybe it’s a slower way than chasing losses, but it’s surely a better way. Trading is no get rich quick game, but a ‘game’ of discipline and patience. There will always be losses, but discipline will save your account and lead to profit.
- Getting out of balance gets you into emotional trading and can make you start chasing losses.
- Chasing losses by increasing trade sizes will never increase the chance of getting in the money, but does increase the chance of going broke.
- Chasing losses by taking more, but lower quality setups, will never increase your chance of getting in the money, but lower your chance of recovery.
- Increasing the quality of your trades can increase your chance of recovery and get you back on track in the long run.
To be Continued… Playing Mindgames Part 2 – Fear is the Biggest Enemy