The vast majority of the mistakes you’ll make in trading will come from your expectations being out of line with the reality of the markets.
A simple example would be you believing you’ll win on every trade.
All traders know this is impossible yet when they place a trade secretly they do believe its going to end up being a winner.
Expectations if not correctly managed have the potential to do significant harm to your trading account, today’s article is all about understanding what expectations are, where do they come from and what can we do to control them better.
What Are Expectations ?
In the most basic sense expectations are beliefs you hold in your head of one event happening over another.
There are two types of expectations present in trading Forex:
The first is the expectations you have WHEN trading……
…..And the second is the expectations you have OF trading.
Both of these types of expectations can present different problems for traders.
An example of a potential expectation you have OF trading is, If you’re a beginning trader and expect that in your first year you’re going to trade a £300 account up to a million.
Whilst I wouldn’t go as far to say this is impossible, its highly unlikely a beginning trader will be able to accomplish this without taking massive risks, these risks are what make having an expectation like this dangerous.
If the trader begins taking large risks he is setting himself up for a scenario where he could potentially blow his entire trading account, he is unaware of these risk due to his belief that he can actually make a million a year.
In comparison to this an expectation you have WHEN trading can be any number of things related to when your actually trading the markets.
If you wake up tomorrow and think the market is going to fall then this is an expectation you have when trading.
Expecting one event to happen over another is something every-trader does on a daily basis, it forms the basis of our trading decisions, you have to believe to some extent that one event is going to occur over another in order to place a trade in the first place.
Problems begin when the trader fools himself into thinking what event he believes is going to happen is certain to take place.
Holding onto a losing trade is a problem created by having unrealistic expectations of what can happen when trading.
A trader who gets stuck in a losing position does not put a stop with his trade due to him believing without a shadow of a doubt the market is going to move in the direction he has predicted, if he had even the slightest bit of doubt about the direction of the market he would put a stop on his trade to protect his position, since he doesn’t believe this when the market eventually moves against him he fails to realize his analysis has been incorrect, and continues holding the trade with the expectation that the market will at some point move back in his favor and he will have been correct all along.
Why Are Expectations Dangerous ?
Expectations can be the killer of your trading account.
People trade with incredibly unrealistic expectations of what can happen.Traders feel like they should win of every trade place, they expect it to happen even though deep down they know it’s impossible. When they do get into profitable trades they expect the market to continue moving in the direction they anticipated when really its more likely to move in the opposite direction.
If you can keep your expectations to a minimum you’ll put yourself in the most productive mindset possible to make consistent money from trading the markets.
The only way you can achieve this is by not allow yourself to be disappointed by events that occur in the market, whether that be the market moving against your position or a trade not working out as initially planned, as soon as you begin to get upset or disappointed your winning mindset will be effected.
If you expect to have a winning trade and it ends up being a loser your going to disappointed the market didn’t do what you initially expected it to do, how disappointed you’ll be is entirely dependent on how much energy you put into believing the market was going to move higher.
Lets say I woke up tomorrow and carried out a significant amount of analysis on EUR/USD moving up from its current price.
I see that it’s sitting at a support level which has confluence with the 50% Fibonacci level and to top it off a bullish pin bar has just formed, all of these things leads me to believe there is a very high chance the market will move up from here.
I place my trade and watch as the market begins to fall.
When it hits my stop the harsh reality of losing finally hits me.
I’ll be disappointed that I’ve lost money, I really believed the market was going to go up! I mean we had the support level, the 50% fib level and the bullish pin bar all indicating to me the market was about to climb significantly higher.
It didn’t do that, so now my optimistic mindset has changed to one of disappointment, any trading decisions I make for the rest of the day will now be affected by this trade.
How To Keep You Expectations In Line With Reality
Always Expect The Worst
One of the ways you can keep your expectations to a minimum is by always anticipating the worst with every trade you place.
If you expect every trade you place to be a loser then when you win and make money you’ll be surprised !
You shouldn’t just do this when placing trades though ?
When analyzing the market in terms of trend and different technical tools you should always expect the worst, if you mark a support or resistance level on the charts don’t sit there and think “the market is definitely going to turn here” because that is you putting an expectation upon what you think is going to happen, the market may not turn when it hits the support level, it may just fly straight past it, there’s no definite way for you to know what is going to happen before it happens.
By not expecting anything to happen when the market hits the support your leaving your mind open to all the possibilities of what the market can do, therefore you will be in the most productive mindset to take advantage of what unfolds when the market does eventually hit the support level.
Risk As Little As Possible
The number one best way to keep your expectations in line with reality is to risk as little money as possible on each trade you place.
Of course this is easier said than done, some people are unable to risk less money on each trade due to their accounts being so small, the only way they are able to risk less is by learning more about the market and the intricacies of their trading strategy.
The more you understand about the market the better the entries you will be able to get into trades which in turn will lower the distance of your stop-loss thus decreasing the amount of money you’ll have to risk on the trade.
Start Going To Work
Going to work is the easiest ways to keep the expectations you have when trading to a minimum.
Naturally if you work during the day the only time your going to be able to place trade is when you’re at home during the night.
Placing your trades the night before you go to work gives you the advantage of not really having any expectations of where the market will go during the day because you won’t be available to monitor your position. If you’re at home and watching your trades play out you will be likely to come up with expectations of where the market might move in regards to your open trades.
Being at work means you will not have this problem, and will avoid the majority of the mistakes caused by having expectations of where the market may move.
Whilst some expectations can be seen as positive, the majority of them are annoyances which, if not properly manged, can turn your trading upside down. I hope with this article you have learned some new methods you can use to keep your expectations inline the reality of trading the forex markets.