Psychology: Holding a trade you don’t want to be in.
I often get asked, how long do your trades take to complete? My answer is anywhere between 1 and 36 hours. Ideally the aim is for a trade to complete within 24 hours and my average completion time is 16 hours.
A couple of weeks ago I placed a CAD CHF long trade which took over two days to stop out. And it does open up a psychological point I think is worth making…
When I’m placing a trade, it’s based on the narrative of the moment, the longer the trade goes on, the greater the chance of the narrative changing.
On this occasion, deep down, my preference was for ‘long’ AUD or GBP Vs my ‘short’ currency of choice (at the time) CHF.
But I chose the CAD to long due to the fact the AUD and GBP charts had already risen too far to place a stop loss behind a 1hr swing, plus Canada had just reported higher than expected inflation data. At the time, I felt it was a shrewd decision. And if I was put back in that moment, I still think I would make the same decision.
But, two days later, the trade came close to the profit target but is now going sideways, whilst an AUD or GBP trade would have (more than likely) hit profit.
At this point, what do you do? The trade is going sideways and if anything, looks like it’s going to stop out. And you are now noticing other potential trades.
First and foremost, it’s mathematically sound to simply wait. Let the trade play out and form a fresh opinion once it’s completed. And actually, that is my recommendation. Just continue to keep on top the market narrative and be ready to trade again when the time is right.
But…there is a case to say that after two days or longer, if the narrative has changed and you have genuinely identified a new opportunity. You could close the original trade to place a new one. Just be aware that this method leads to a slippery slope of emotion. And if you find yourself doing it on a monthly basis, I would say stop. To give you an idea, off the top of my head, I can recall two occasions over the last five years I’ve felt the need to close one trade with a view to opening another. And I would suggest at least 18 months of consistent profits behind you before you even consider it.
At the end of the day, you placed the original trade with good reason. And ultimately, the difference to the account by the end of the year would be so negligible that ‘closing a trade to place a new one’ is probably, although viable, not worth the potential spiders web of emotion that comes with it.
Ultimately, the reason we use a higher risk reward ratio per trade is to allow for half of them to lose.
That’s my thoughts on a trade that has ‘gone on too long’.
What about a trade that is doing well but you’ve identified a new opportunity?..I’ll offer my views on that very soon.