An example of how trading in fear is bad for your account

Having had a hard time day trading the EUR/USD last week, things haven’t been well for me this week either with the market in a gridlock.  My one and only viable setup so far is built for a trending market.  So this range-bound market is new territory for me as I experiment (in hindsight, haphazardly) to come up with more profitable forex trading setups.  As you can imagine, trading without discipline is a recipe for diaster.

I have given back all the paper gain from this month by the start of this week and is treading on thin ice with my demo account dipping dangerously close to the November opening balance.  Needless to say, I do not want to see my account in the red for this month.

But that is what happened after today’s string of failed trades.  I am officially in the red for this month, for now.  While there are several mistakes I made resulting in this mess, I think it all boils down to one flaw in my trading this week.  Yes, those day trading stints I did surely have put a dent in my demo account, but what’s worse is that I’ve unconsciously have let those losses affect my trading mentality.

These losses were stuck in my mind and my mental “goal” for this week was recovering from them.  However, I have approached the problem in the wrong way by not wanting to lose anymore in my account.  In other words, I was afraid of losing.

So how did that materially affect my trading?  Here is a simple example as illustrated in my order history on the GBP/JPY chart attached at the bottom of this post.  The 3 yellow triangles are my short entries and the 3 red dots marks the stopped exits.

According to my setup, my original entry at 149.50 had a stop at 150.50.  But I moved my stop closer to 149.80 in the morning because I didn’t want to risk more.  That got taken out easily as 149.80 is within the congestion zone.  Then I tried to short it a couple more times with tight stops because I see the downside potential to be still intact.  Those were eaten up alive too and now I don’t have a position because it would have been more foolish to keep trying in vain.

While just 3 trades wouldn’t have done much damage, I was doing the same thing across the board in shorting CAD/JPY and EUR/CAD.  A few here and a few there.  They add up to a bad day.

As of this writing, it looks like these pairs are finally moving in my direction.  But instead of being patient with reasonable stops, I thought I could do better and micro-managed my positions to end up taking multiple small losses and with nothing left on the table to ride the move.

So what is the correct way of following up on a dent in the account?  I should have done the following instead:

1. Reduce risk exposure by limiting trade size or overall opened positions until I am back up.
2. Focus on what I did wrong last week and stop doing that, i.e. no more day trading.
3. Recall my best trades and do more of that, i.e. my one and only finalized setup, FTC.

Not so coincidentally, now that I’m in the deepest drawdown ever, this is as good as ever to put this emergency recovery procedure into practice.

GBP/JPY, 1-hour

Related posts:

1. Closed EUR/CHF and GBP/CHF Shorts: Best. Trade. Ever.
2. My bad EUR/USD day trading and what to do about it
3. Early bird does not get the worm in forex trading
4. October 2009 Trading Performance Review
5. Paper Trade: Long GBPJPY @ 144.24, Stop 143.60, Target 148