Monday, October 29, 2012

Why does a currency pair turn in the opposite direction the minute after we enter the market?

1. Illusion

When I first started trading, I had the illusion that the market was moving against me every time after I entered a trade.

Imagine these two scenarios after you enter a trade:

Scenario 1
The market immediately moves against you.

Scenario 2
The market moves 10 pips in your favour and the next minute it moves against you towards your Stop Loss.

Traders tend to consider both scenarios as moving against them but in fact, in Scenario 2 the market actually moved in their favour first.

The market moves up and down by the second, so traders can tend to perceive market is moving against them because of the basic human emotion called “fear of losing”.

To avoid these illusions, I don't focus my immediate attention on the charts after I enter my trade and have my Stop Loss and Take Profits in place. I will only check my trades on a periodic basis such as every 1-2 hours to check if the trade has hit a profit or loss.

2. Inappropriate Entry Price

The other possibility is that a trader enters the market at an inappropriate price or time. For example, a trader may enter a Long position after market actually displays signs of a downtrend and the market really does go into a downtrend after the trader enters.

To improve your performance in this situation, you can review your trades on a regular basis to find out whether you are trading correctly or if there is something not right with your trading system.

The best way to do this is to find the right coach to review your trades together with you. A coach is able to highlight your "blind spot". A coach is also emotionally detached from your trades, so he is able to provide unbiased comments on your trades.

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