Closing trades too early is a problem affecting thousands of traders the world over.
It’s a mistake which can cause you to not only unnecessarily lose money, but also come out with fewer profits than what was initially available. Today we’re going to look at the two ways traders end up closing trades too early, and what you can do to mange this problem more effectively.
Why Do You Close Trades Too Early ?
To really understand why we close trades early, we must first determine when we are closing trades too early.
The way I see it there are two different ways traders can close trades too early.
- When you’re in a profitable trade and instead of holding onto it you close it because you feel as though the market is about to move in the opposite direction.
- When you have just placed a trade and the market begins to move against you towards the position of your stop-loss.
Both of these mistakes are caused by the trader thinking he knows what is going to happen next.
Lets begin by looking in more detail why traders close profitable trades too early.
Closing A Profitable Trade Early
The reason why traders close profitable trades too soon is due to the traders fear of missing out.
When your in a profitable trade the last thing you want to happen is lose the profit your trade is currently in, whilst people have the ability to take profits off the trade at any time unless they close the trade completely there is still going to be slight element of disappointment if they end up coming out with less profit than what was available when the trade was open.
The way the decision to close a profitable trade is made inside the traders head all depends on the price action they see unfolding on their charts, if the trader is in a long position and he begins to see bearish price action he will be scared of the market reversing and lowering his current profit.
A sudden move lower will force the trader into action, if the market just drifts lower with small bearish candles its unlikely to make him scared enough to close the trade, on the other hand if the price suddenly starts dropping with large bearish candles he will close the trade almost instantly due to his profits rapidly decreasing.
How Do You Stop Closing Profitable Trades Too Early ?
Holding onto a profitable trade is a difficult problem to solve.
It really depends on what market conditions your trading in. If you have placed a trade when the markets are consolidating, then your trades should be closed when the market reaches the opposite side of the consolidation, as you know the odds of a continuation are slim until the market breaks out and begins to trend.
If your someone who find that they close profitable trades too soon then the way to combat this is to make two trading plans.
One for markets which are trending and one for markets that are consolidating, different market conditions require different strategies, a trending market is one in which the main emphasis will be on getting one trade placed onto the trend and then using the money to scale into progressively bigger trades while holding onto to your existing positions.
Consolidations on the other hand require you to use trading strategies which have short holding periods, this will depend somewhat on which time-frame you trade-off, a trader seeing a consolidation on the daily chart is not going to close his trade at the same time as a trader trading a consolidation on the 5 minute chart.
Closing A Trade Before It Hits Your Stop
Closing a trade you’ve just placed because of the market moving closer and closer to your stop, is a problem born out of fear of losing money.
The trader believes he is going to lose on the trade even though the market hasn’t hit his stop yet, the main purpose of stop-losses are to protect how much money you can potentially lose on a trade, closing a trade before the market hits your stops means you have not accepted the fact that there is a possibility you can lose money on this trade.
It sounds silly, we all know we are going to lose money when trading so why do we try to avoid it ?
The reason comes down to the ego of the trader, the trader closes his trade because he believes he already knows what is going to happen before it happens. In the traders head he thinks the market is going to hit his stop, when the traders sees the market getting closer and closer to his stop it gives him the impression that he is definitely going to lose on the trade, if he does not close the trade right now and take a small loss, the market will continue going against him and his stop will be hit.
Here we have a typical bullish pin bar setup seen on the daily chart of EUR/USD.
I want you to imagine you have just placed a buy trade based on this bullish pin.
You place the trade, it’s a good setup, the pin has a significant wick and is showing a large rejection from a support level (which I haven’t marked ) Overall, had you taken this trade you would be pretty confident of the market having a high probability of moving up from here.
Now imagine if you woke up the next day and saw the market had made its way back towards the lows of the pin, how would you be feeling ?
This is a situation where a trader will close a trade early, he will look at the chart and think “it’s clearly going to go down from here” he doesn’t know this, but he believes it as the market has moved to being in close proximity to his stop. If he does close the trade, it will ease the pain felt by not losing the full amount of money. If, like in the example, the market actually ends up going back in the direction he originally anticipated, its likely the frustration and pain he will feel from taking himself out of what would have been a profitable trade will end up being greater than if he had just let the market hit his stop in the first place.
Where You Should Really Place Your Stop
Another thing which contributes greatly to traders closing trades too early is where they place their stop-loss.
Correct stop-loss positing is one of the critical skills traders need to master in order to trade profitably.
Unfortunately, the vast majority of traders do not place their stop in the right way, by that I mean they place their stop based on how much money they want to lose rather than placing it at a point where they know their trade will be wrong.
For each trade you place there should be a location in the market where you know if the market breaks this point your trade is invalid and the market has a higher chance of continuing in the opposite direction.
A really simple example would be a break the high or low of a pin bar wick.
In a pin bar setup your stop goes above the high or low of the pin. The whole reasoning behind putting your stop here is based on how the trading setup itself works, if the market breaks below the high or low of the pin ( depending on the pin ) the pin bar has failed, and its likely the market is going to move in the direction of the break.
When traders place their stop based on how much they want to lose, it actually increases the likelihood of them losing money and encountering more losses, you cannot edit fundamental components of a trading strategy just so you can risk losing less money.
How To Stop Closing Trades Before The Market Hits You Stop
As far as closing trades when the market is near your stop is concerned, the only real way to combat this is by altering your trading plan in such a way where it states that you will not close trades until the market has hit your stop. It will be difficult for many traders to do this as the pain of losing is so great that traders would rather try to avoid it than make money.
If you happen to be someone who closes their trades before the market hit your stop, my message to you is this…….
If you cannot learn how to lose money, stop trading.
You will not succeed trading the forex markets or any market for that matter, if you do not accept that there will be times when you will lose money, its unavoidable and a fact of trading you must come to terms with.
Learning how to give trades the chance of working out successfully is a skill you’ll need to master in order to make decent money trading the forex markets.
It wont happen overnight, this will be an ongoing process. No amount of explaining will allow me to show you the best way of doing this, it can only happen by you seeing the benefits in real-time.
Closing profitable trades too soon will get easier once you see the benefits it can bring to your trading.
All it takes to make a significant amount of money from forex trading is one trade placed onto a trend, that one trade can provided you with enough money to then place another trade at a higher leverage, if you keep scaling in like this over and over again its possible to make large profits without risking much money.
If you still close trades before the market hits your stop then the only way for you to come out of this habit is to suffer enough pain and frustration from doing this over and over again that you simply make a promise to yourself that you’re not going to close trade prematurely any more.
Its one thing me telling you to stop doing it, but another thing entirely you actually following through on it.