Know when to walk away, know when to run.

In my demoing, I would also hate to close positions that were down. And of course they would always get worse before resulting in a margin call; the position being closed, and the market gobbling my money all up.

If this happens with my real account; the couple of thousand dollars that are invested could be wiped out very quickly. Must be what happens to the unlucky 90% when they are losing their $15,000 each.

When I went reading about money management and position sizing I found a very strange, paradoxical information which goes against preconceived ideas many people have.



The first is that people are more likely to be risky with losses, and safe with wins. David Silverman wrote about the strange occurrence in an article here: http://www.sfomag.com/homefeaturedetail.asp?ID=290489088&MonthNameID=July&YearID=2007

He writes about two scenarios that are presented to people. Both give a choice between two possible outcomes.



Scenario 1:

You have 100% certainty of getting $3,000
or
You have 80% chance of getting $4,000 and a 20% chance of getting nothing.

Scenario 2:

You have 100% certainty of LOSING $3,000
or
You have 80% chance of LOSING $4,000 and 20% chance of breaking even.

Silverman states that 92% of respondents chose certainty in scenario 1, and risk in scenario 2.

This 92% of people choosing these strategies ignored the expected return of the scenario. In scenario 1 the expected return of the bet is profit of $3200 ($200 more profit then the certainty). In scenario 2 the expected return of the bet is loss of $3200 ($200 more loss then the certainty).

It should follow logically, that betting should obtain you (on average) a better outcome when in the positive scenario 1 and certainty should obtain you (on average) a better outcome when in a negitive scenario 2.

Why do people seemly respond to these quandaries opposite to expected?

Silverman thinks that the results show that rather the hating risks, humans hate losses. The fear of taking a loss can make us behave irrationally. It appears people in the test are only focused on the negitive outcome and are willing to do anything to try and avoid it; even something irrational and silly.

In conclusion Silverman gives traders the following advice:

[Traders] sell winning trades too early, satisfying the desire to be right, and hold losers too long, hoping that the market will turn around, saving Trader from taking a loss.


If you have convinced yourself that you must grab a profit at any cost, because a sure thing will always be better than the uncertain future or that realizing a loss constitutes failure, you have passed into the realm of irrational thinking.

I have yet to develop a system of existing profitable trades that is comfortable (profitable???) for me, however one thing I have taken from Silverman's article is not to be afraid of stopping out. It is a bigger sin to hold on for a market pull back. Accepting losses psycologically is a big battle it seems for Forex Traders. I know it was my thinking as a novice.

Is it co-incidence that 90+% of forex traders go bust and 92% of people answer that question 'irrationally'?