The 4 Stages of Loss in Forex

One of the first things that you should learn in forex trading is accepting defeat. Although it is a normal part of the overall trading process, losing is something that many traders–both newbies and pros–have difficult with.

Think about it. Losing in a game where nothing is at stake is tough enough, what more when there is actual money that you have worked for very hard is involved?

The main reason behind the difficulty in coping with losses lies with the lack of understanding rather than actual psychological problems. People who are experiencing loses misunderstand the negative emotions that are attached with them, which can cause anguish and despair. This eventually makes them quit trading forex altogether. People who cannot deal with the psychology of losing end up exiting the forex trading business quickly.

In this article, I’d like to address that lack of knowledge with losses. In the next several paragraphs, I’m going to talk about the 4 stages of loss in forex, namely, denial, rationalizing, depression, and acceptance.

Do the terms sound familiar? They should, because they’re similar to the 4 stages of grief. Do note, however, that they are applied differently in forex. My desire is that by getting to know the 4 stages, you are better suited to handle the losses that come with trading.

Stage 1: Denial

The first stage of loss enables you to deal with the losing trade. In this phase, you deny to yourself and to others that your trading idea was wrong, and that the loss wasn’t your fault. Reasons like “I was stop hunted” and “I didn’t really care for that trade” are normally used. There’s nothing wrong feeling this way, especially if you’re new. It’s a way to ease the blow to your ego, survive the loss, and move on.

Stage 2: Rationalization

After the denial stage, you move on to rationalizing your trade setup. This is the point in time where you point out everything that’s right about your trade idea and do not even think about what you did wrong. You cite the appropriateness of your trading plan, profit target, stop loss, and entry point but totally disregard that you actually did lose the trade and made a mistake somewhere.

Stage 3: Depression

At this point, you have already looked at all the possible external reasons for your loss. You then turn inward and consider the idea that the loss was completely caused by your own doing.

Although it's reasonable to take responsibility for your loss, blaming yourself too much can be damaging to your forex career if you consistently doubt yourself. You might ask yourself questions like "Is forex trading really for me?" and "Why go on at all?" You could even wind up withdrawing yourself from the business altogether if you can't find enough reasons to keep pushing forward.

Those who have experienced this kind of self-doubt can attest that the longer the losing streak is, the more the intense the feeling of depression. In some cases, you could even see yourself thinking of pursuing other business ventures out there and giving up on forex trading.

Stage 4: Acceptance

In this stage, you begin to realize that it's unhealthy to blame yourself for everything that went wrong. Even though you've accepted that the loss was partly your fault, you are also mindful of the fact that the forex market is a wild untamed beast and that there are plenty of market factors beyond your control.

Let me clarify though that acceptance isn't simply about feeling okay about the loss. In truth, acceptance is more like aligning yourself with reality and realizing that the loss cannot be undone.

When you reach this stage, you accept that you have made some mistakes on your part but that there are also things you are unable to control. Some even say that acceptance is a mix of rationalization and depression, as you combine the two before you are able to move on.

At the end of the day, it's important to remind yourself that you can never truly reverse what has been lost but that you can make up for it. One obvious way to do this is to have a winning trade and recover financially, but you can work on rebounding mentally as well.

You can come up with improvements for your trading strategy, exercise better risk management, or just figure out how to handle your losses better. Instead of simply denying the loss, you have to move on, adapt, and grow.

The Bouncing Zone Strategy — Part 1

Introduction

Your are about to read the part 1 of a 3 part article called "the bouncing zone strategy".

You should know that I haven't invented this strategy. I've learned it on the internet and with friends, and then tweaked it to feet my needs. Some people call this strategy "supply and demand levels", but I think "bouncing zones" better describe what it's about.

The setup

This is a strategy based on Price Action, so the setup is quite simple: just the price in candle sticks. No indicator at all. I trade mostly on the main pairs (EUR/USD, GBP/USD, etc.), and on a 1h timeframe (TF). But this technique should work on any pair and any TF.

The basic idea

Sometimes we see price moving very rapidly in one direction. What does it mean? Let's use an example to make things simple:

• Some people are selling a huge amount of $currency, and these "some people" are usually big banks
• That makes the price drop quickly from 1.3 to 1.2
• It means that a lot of people who wanted to sell $currency at around 1.3 couldn't do so, since price moved so fast
• So next time the price goes back around 1.3, a lot of sell orders are going to be triggered, and price is going to move down again
• Of course it works the opposite if price increased from 1.2 to 1.3

Once you realise that, you just have to use this information at your advantage. Here's a EUR/USD chart that shows this.

Legend:

• 1) Price dropped quickly from here, we call this a zone
• 2) Then when the price reaches back the same zone, the price bounce

Now you should understand why we call this strategy "bouncing zones". The zones from where price move quickly in one direction are called:

• Demand zone, when people want to buy and price will increase
• Supply zone, when people want to sell and price will go down (like in the example chart above)

So you just have to identify these supply and demand zones, place orders when the price goes back into these zones, and wait for the price to bounce. Obviously not all zones are going to work as planned. But from my experience, enough are going to work in our favor to make this system work, and make money.

How to identify bouncing zones

Identifying zones is quite easy. All it takes is two steps:

• 1) On a chart, identify all strong price movement
• 2) Find the base of the price movement, where the price moves slowly in sideways. This is what we call a zone.

In the example below we see 3 strong price movement. There is a supply zone that already worked, and a new demand zone.

You can see that it's quite easy to do!

How to precisely draw zones

This part is hard to explain precisely, cause there may be some rules to follow, but your also need some kind of instinct, that you can only learn by doing. Drawing zones is an "art". Anyway, the basic idea is this:

• Look at the base of a strong price movement to find some candles moving sideways
• Make the zone cover all of these candles (body and shadows)
• Then refine your zone:
  • If it's a supply zone, you do not care about the lower shadows of the candles
  • If it's a demand zone, you do not care about the upper shadows of the candles

Here are a few examples of zone drawing:

Legend:

• In blue + orange: the whole zone that covers all the candles
• In orange: the shadows we're not interested in, as explained above
• In blue: the refined zone to use for the trade

Entry, stop loss and take profit

Once you identify a zone that you want to trade, you have to set up the trade. Here's how I do it with a little example.

Legend:

• Blue rectangle: the supply zone
• Blue line: the entry of the trade, at the beginning of the zone
• Red line: the stop loss (SL), usually 2-3 pipes above the end of the zone
• Green line: the take profit (TP), that is simply placed in a way to have a 1:2 or 1:3 risk:reward ratio (in this example it's a 1:3)

So once you know how to draw zones, setting up trades is really simple with these rules.

Examples of bouncing zones

Below are 4 examples of bouncing zones from CHF/JPY charts. Two are demand zones (top), and two are supply zones (bottom).

You should try to find zones on your own charts, and see the price bouncing into them

Credit: 21pips

25 Rules of Trading You Should Follow!

Even though fewer than 15-25% of all people who trade financial markets are successful over the long haul due to being un-educated about their investments or by consistently letting greed exceed need, there
is a small group of elite traders who consistently make huge profits hundreds of thousands, even
millions of dollars a year!

What is it these millionaire traders are doing differently?

This list of 25 "Rules of Trading" that many of these top traders follow religiously. We hope you
find them enlightening.

1 YOU MUST DEVELOP DISCIPLINE:
This may be the hardest "rule" to follow, yet it may be the most important of all. Without discipline, you will
be forced to constantly react to the whims of the marketplace, rather than controlling your fate and acting in
your own best interests.

2 KNOW WHY YOU TRADE:
There are dozens of reasons why people trade forex. Some trade to control their financial fate. Some like the
fast pace. Others like the "hunt" for a big kill. Whatever your reason, you'll trade better and enjoy it more if
you understand why you do it.

3 DON'T BET THE FARM (OR THE HOUSE EITHER!):
Futures trading can be very risky, so don't fund your trading account by committing money which, if lost,
could throw you into bankruptcy. Instead, fund your account with money to be used only for investing.

4 BE MENTALLY INDEPENDENT:
One of the keys to successful trading is mental independence the ability to free yourself from concerns that
might distract you from trading. That doesn't mean you should ignore your friends or family; it simply means
you should avoid putting yourself in a situation where financial fear or "static" from friends and family gets
between you and your trading program.

5 WALK BEFORE YOU RUN:
Don't jump into the markets before testing your abilities. First, try trading on paper, with no real money
involved. Also Demo trade because it's wise
to become thoroughly familiar with the mechanics of trading before graduating to a live account and/or
more volatile markets.

6 DON'T PLACE ALL YOUR EQUITY IN ANY SINGLE POSITION:
Many successful traders recommend keeping three times as much money in your margin account as you need
for any single position. Viewed another way, this means you shouldn't commit more than one-third of your
account balance on any single position.

7 DON'T LET EMOTIONS OVERRULE YOUR BRAIN:
Don't hope for a move so much that it clouds your vision. Hope is a wonderful virtue in many areas of life,
but it's often an enemy to forex traders.

8 SET YOUR GOAL, THEN TRADE TOWARD IT:
Profits go to those who act, not those who react. With that in mind, it's wise to decide your entry and exit
points, and your profit objective, well before you place a trade.

9 DON'T CHANGE HORSES IN MIDSTREAM:
You can and should make minor corrections throughout the trading period, but don't let the ups and downs
that always occur during the trading day affect your overall game plan. Unless the market conditions that first
led you to place your trade change, don't abandon your original objective.

10 DON'T TRADE TOO MANY MARKETS:
Many beginning traders feel they must stay on top of all markets, even though they only trade a few. That can
quickly lead to paralysis from information overload something even experienced traders can suffer from. Top
traders, on the other hand, stay focused on a select few markets and completely master them.

11 DO YOUR HOMEWORK:
There is nothing more critical to the process of making money in the markets than fact-based knowledge of
what's going on. Before you place a single trade, you should know the underlying trend, direction, what
triggered it, the current trading range, what signals you should be looking for, and what your trading
objective is. All of these require information that's readily available from a variety of sources. So do your
homework; according to our top traders, it always will be time well spent.

12 DON'T FOLLOW THE CROWD:
Historically, by the time the general public "discovers" a major market move, it's over. For that reason, most
successful traders feel uncomfortable when their position becomes popular with the buying public especially

13 NEVER ADD TO A LOSING POSITION:
When your position is losing money, it signals that you are out of step with the market. You are, in a word,
wrong! That doesn't mean the market won't eventually turn around, but it usually means it's time to exercise
extreme caution and begin applying proven money management techniques to conserve your remaining
equity.
Some traders argue that adding to a losing position is nothing more than "price averaging," but the consistent
winners view it as trying to justify the magnification of a trading mistake.

14 CUT LOSSES SHORT:
One of the most dangerous mistakes new traders make is failing to admit when they're wrong. Not so with
savvy, big-money winners; they try to take losses while they're still small, then wait for a better day.

15 LET PROFITS RUN UNTIL YOU HAVE A REASON TO CASH IN:
Successful traders let profits run until they see some indication technical, fundamental or both that it's time to
liquidate only because profits are available. They only close out a profitable position when they see and end
in sight.

16 WHEN IN DOUBT, WAIT IT OUT:
Trading decisions based on price moves or news items that occur during the trading day are usually poor
ones. Traders who make decisions based on such news are often whipsawed back and forth until their trading
accounts are in tatters. Generally speaking, developments that are powerful enough to move market prices
have a longer-term effect that will provide several profitable windows of opportunity beyond the start of the
move. So if you think a particular piece of news will move the markets, back away from your position and
take a fresh look before re-entering.

17 BE CAREFUL WHEN USING "STOP LOSS" ORDERS:
One of the smartest tools you can use is the "stop loss," it can help you cut losses if a market turns against
you. But place "stop loss" orders carefully, the top traders caution. Place your stop at the same time you place
your order. Don't place your "stop" too close to the current price, or you'll get "stopped out" before you have
a chance to make profits.

18 DON'T PLACE ORDERS "AT THE MARKET":
The only time a buy/sell order should be placed "at the market" is when you have to liquidate a position in a
hurry. At all other times, an "at the market" order should be placed at a specific price.

19 AVOID TRADING IN LARGE FUNDAMENTAL NEWS IMPACTS:
it's a tricky business left to the professionals.

20 ADD TO YOUR POSITION PYRAMID STYLE:
Never add more lots to a position than you had in your base (original) commitment to that market. If
you started with 5 lots, add 4, then add 3...2 and finally, 1 more shortly before you liquidate the position.
This "pyramiding" technique helps you avoid over commitment while optimizing profits.

21 BE PATIENT:
While there is money being made each and every trading day, that isn't how the millionaires make their
money. They recognize that profit opportunities vary wildly when spread over time. They wait patiently until
they spot the right signals, then enter the market with confidence. You can do the same and be well
positioned to enter the market during those times of highest potential.

22 TRADE DIVERGENCES FROM THE "NORM":
This is one of the strategies top-dollar traders use regularly to rack up big profits. The minute they see a
market beginning to stray from the "normal" expected path, they make their move. For example, if traders in
general believe the market is bearish, but prices rise through previous resistance levels, the top traders figure
it's time to buy.

23 DON'T TRY TO PICK PRECISE TOPS AND BOTTOMS:
Even the very best traders aren't very good at picking the precise point at which a market reverses direction.
Realizing this, they get out when they feel the move has lost its momentum and ignore the final few ticks of
the move.

24 SHOP THE ODDS:
Smart traders look for market conditions where risk is low and profit potential is high. For example, if a
market is trading near historical lows, it would usually mean there is far more potential for a bullish move
than for a continuation of the down move. This is the kind of situation in which new millionaires are created
perhaps you'll be one of them

25 TAKE AN OCCASIONAL BREAK FROM THE MARKETS:
If you trade each and every market day, sooner or later your judgement will become blunted and dulled by all
the action around you. When that happens, you'll begin to lose money. So ... take a trading break every few
weeks. Stay out of the markets for a few days weekends and holidays don't count and use the time to do
something totally unrelated to trading. You'll return to the markets refreshed and view the markets in a new light,

Credit: Babypips