I expect the S&P 500 index to trade between the recent high and low for a while, several weeks o...
What Baseball & Trading Have in Common
04/22/2014 6:00 am EST
In baseball as in trading, winning depends on you not giving up the “big inning,” says Omar Eltoukhy of DTSForexSystem.com.
We wouldn't embark on our trading journey if we thought we were going to lose money. I think only the most masochistic of gamblers gets into trading forex specifically to blow money. Yet, after only a bit of experience, virtually any trader realizes losing money can happen even when that is the last thing on their mind.
So today, I want to focus on the forex version of a classic baseball pitching saying “don’t give up the big inning.” In baseball, the pitcher has a unique position in that every ball on the defensive side goes through his hands on the way to whatever the result may be. He has “the game in his hands” and his supporting cast of defensive players can only watch and react to what happens after the ball leaves his hands.
I would like to make the analogy that YOU are the pitcher in the ballgame of trading. In baseball, a pitcher can lose composure or get tired and pitches that were hard to hit before now sail around the ballpark to the joy of the guys holding the bat. It is assumed that on any given day, a starting pitcher is allowed to give up SOME runs, with the complementary assumption that his team’s offense will in turn be able to score against the rival team. The game becomes as a pitcher, not giving up too many runs, especially in one inning, giving the offense a good shot at not only equalizing but putting more runs on the board creating a winning situation.
In forex, this concept is similar. You as a trader, WILL lose some trades, but the goal is to not give up so much that your wins later will propel your account further than the losses pulled it down. But so often in forex, as in baseball we give up “the big inning”. In baseball, a pitcher that gives up five runs in an inning, not only creates a large deficit in actual runs, but creates a psychological deficit for his teammates. Now, not only do they have to get on base, but they have to get A LOT of guys on base, just to “break even”. The same thing happens in trading.
One or two losing trades create a deficit, but nothing a good win or two can’t fix. But when we start losing a lot of consecutive orders, or lose big amounts due to over-risking trades, we create not only a big financial deficit that’s hard to overcome, but a psychological wall that seems overwhelming. We start trying to make back too much on each trade, just like batters start trying to hit homeruns at every at bat when they are down by a big number, instead of piecing base hits together to score. This creates a dangerous situation in baseball and in trading, and in both cases, not somewhere that fosters a steady approach to gains.
So, how do you know when to simply “pull the plug” and stop trading? There are common experiences I have had in my years as a trader that now become red flags when I see them:
Double-Down: Oh so you lost a couple of trades. Maybe it’s a 100 pips total. Now you think, I can make that back with a 50-pip gain if I just double my trade size. This is dangerous and a slippery slope. It just takes one loss with the double-sized order to really make that divot in the account into a hole. Then, you find yourself thinking “I NEED to double this next one just to make the money I just blew back”. This thinking continued not very long will certainly blow the account. Whenever you find yourself talking yourself into blowing your normal risk, you should realize that you are now gambling with blowing your whole account.
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Heart-in-Throat Trading: When you feel the adrenaline, it’s probably time to stop. Yeah, that loss on the books is bad, but how sharp are you thinking at the moment you are pacing around, praying that THIS trade just wins, pulling your hair, and feeling that dry mouth? Trading takes calm confidence to make the best decisions, and if you find yourself really emotionally wrecked or “amped up,” you should just close your orders and take the rest of the week off. Trust me, the loss you just took may look bad, but it’s not as bad as blowing the whole account emotionally trading to get that loss back. If you feel sick, or scared, you should not be trading. Take some time, cope with the booked losses, and come back when you are ready to do analysis and real trading. It’s stupid to say there is no emotion in trading, or that there shouldn’t be. You’re human, I’m human, we have emotions. We just can’t let them get the best of us. Don’t trade beyond the “comfort zone”.
Tunnel Vision: Yeah, similar to the last one, except this case you simply can’t take your eyes off price. Need to go to the bathroom? Fire up the tablet so you can take it with you and watch every tick of the market. When you find yourself so glued to the trade that you can’t even look up, you are probably in the danger zone. You aren’t doing your analysis any more which means you can’t make a decision. You hang on every tick, every move of the market and become like deer in the headlights. If you find this happening, CLOSE the trade and take a break!!
No Rest for the Wicked: If you find yourself staying up WAY later than normal, just so you can watch your trade, you are probably in the danger zone. Sure, it’s fun to watch a winner run. But often times, you are staying up to watch a trade that’s losing agonizingly tick lower and lower. Look, you should know exactly what you are risking at the start of the trade. Consider that money GONE. If you win, then you have done very well! If you lose, well, you’ve already accepted that. Either way, you shouldn’t be wrecking your sleep schedule just to watch a trade. If you are, you are probably risking way too much, or wrecking your rules.
Off the Rails: You have completely thrown out the rules. You are taking trades on every turn of the market. Adding to a small winner, then seeing it start to lose, so you add more. The more you trade, the deeper it gets. Soon, every tick starts to affect floating equity severely, and you feel like you HAVE to do something! When our rules start to slip, our ability to make money does as well. The further you go from your plan, the more likely catastrophe awaits you.
All this can be avoided very easily actually! To ensure none of these situations ever describe your trading:
- Create a Trade Plan
- Stick To It
- Create Trading Limits
- Stick to Them
- Know Yourself
- Learn Your System
- Stick to it
Great trading begins with a great trader. By focusing on yourself and how you approach the market, you will find that the desired gains in your experience come much faster than depending on some external force like the system, market, mentor etc. You are in charge! Make sure you trade when you are up for it, and you get out of trading for the day/week/month when you aren’t. Keeping yourself on the right side of your emotions will keep you on the right side of trading and prevent you giving up “the big inning.”
By Omar Eltoukhy of DTSForexSystem.com
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