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How to cure yourself from “recency bias” before you kill your account

by , 31 May 2017
How to cure yourself from “recency bias” before you kill your account
Ben started to dabble in the Forex market.

He's just bought the Australian dollar versus the American dollar for the third time.

And just pocketed R10,000 from his R5,000 portfolio.

He's on a winning streak.

Ben feels that trading is the quickest key to his financial freedom.

Aaah, the jubilation! The smell of sea sand, while he hears the crashing of the waves.

Retirement here we come!

Ben then says to himself “trading is so easy, it's time to step up the game and put in more money so I can retire sooner than ever.”

So he then places R10,000 of his portfolio into the next trade.

He's up R20,000.

Four trades taken and he's turned R5,000 into a R20,000 portfolio in just one day.

So again he takes his winnings and doubles his money again to R40,000.
Three trades later, Ben kills his entire trading account.

What happened?

Unfortunately, he suffered from a terrible, but very common syndrome.

“Recency bias”.

Let me explain what happened.

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What “recency bias” is and why 98% of traders lose
 
“Recency bias” is simply when traders’ base their future trading decisions only on the most recent trades.
 
98% of traders’ find that when they’re on a winning streak, they decide to take on trading with the emotional approach.
 
This is where they disregard their trading strategies, statistics and risk management principles.
 
And the reason they do this is, because inside the trader’s minds is just their desire and passion to beat the market and make money.
 
So in a way, you can think of “recency bias” as a mixture between vanity and greed.
 
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So why did Ben kill his account?
 
Ben forgot about the risks involved with trading. All he thought about was doubling his portfolio over and over.
 
And with the Forex market being a $5.3 trillion a day industry, the market eventually did not go the way Ben wanted it to.
 
If you placed R40,000 into just one trade, this means you’re now risking at least 100% of your portfolio.
 
I say at least, because with gearing it means you’re exposed to a lot more money than what you put in.
 
So if the gearing is 100 times, this means you can risk 100 times more than what you  deposited.
 
So if you put in R100, you could lose R10,000, if the currency crashed to the bottom.
 
If you put in R40,000, you are now exposing yourself to a R4,000,000 potential loss.
 
When the market goes against you, you can lose that R40,000 very quickly.
 
And this is what destroyed Ben and many traders’ account out there... 
 
So what do you do to avoid these enormous losses?
 
Step #1: Make sure you have a tried and tested proven trading strategy
 
You can’t just deposit money based on instinct and emotions. You need to make sure you have a proven trading strategy that you’ll follow day in and day out.
 
This will have the criteria of:
 
~ Where to get in
~ Where to put your stop loss
~ Where to place your take profit
~ The reason for getting into the trade
~ How much money you need to deposit to only risk a percentage of your portfolio.
 
Step #2: Start off with a demo account
 
Next you need to open a demo account, where you can paper trade your portfolio.
 
Make sure you back-test around 20 trades to see how your portfolio would have performed with this strategy.
 
If you can’t make money using a paper account, forget about making money with a real account. 
 
Step #3: Monitor your emotions and keep them in tact
 
Now that you’ve tested your demo account, you need to check on your emotions.
 
With every trade you took in your demo account, did you feel any jubilation, anger, joy or sadness?
 
If you said yes, it means you’ll be far too emotional when you trade with a real account.
 
To lower your emotions, I have a very simple method.
 
Lower the amount of money you placed in your portfolio per trade. The less you risk, the less emotions you’ll feel when you trade.
 
It’s easier to give away R10 in a R1,000 account than give away R800 in a R1,000 account.
 
Once you’ve done these three steps and succeeded with a positive demo portfolio, then you’re ready to start trading live.
 
Follow your trading strategy as it’s written.
 
It might take time to go through those 20 trades, but you’ll learn more about yourself and how trading works in real-life.
 
Just so you know: I’ve spent over R100,000 in trading books, strategies, programmes and newsletters, and for the last 7 years my trading strategy hasn’t changed.
 
If you’d like to avoid spending this kind of money and save yourself time, then I urge you to look at The Forex profit Box.
 



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