Asymmetric Risk- Taking. Are you guilty?

Asymmetric Risk- Taking. Are you guilty? 

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Why we cut profits early and let losses run? In this article I would address the real trading psychology behind it. Lets start with a simple test !

Most traders new to Forex are often guilty ofletting their losses run and cutting their profits short, even experienced traders do it every once in a while. Before we begin, answer the two questions below. When faced with a scenarios below which option would you prefer?

A. 80% chance of winning $2,000 and a 20% chance to win nothing
B. $1500 Profit for sure

A. 80% chance of losing $2,000 and a 20% chance to lose nothing
B. $1500 Loss for sure

Most traders would chose Option B in Scenario 1 and Option A in Scenario 2. Compare these results with your own answers. If you chose the same then unfortunately you will be among 95% of traders who fails at Forex. Read Forex Loser’s Checklist, and see if you qualify. Lets look at psychology behind your decisions.

The two scenarios are quite interesting. Our perception of gain and loss changes our behaviour. When the options of a risky scenario involve profits, traders are risk-averse (risk-avoidance); however when options of a risky scenario involve losses, traders are risk-seeking. The other words, traders tend to seek risk in face of possible loss and avoid risk when profits are at stake.

This asymmetrical way of risk-taking has great implications on trading decisions we make as a trader. Our decision are based “subjectively”, taking in account recent events rather than looking at overall net trading balance. Let me explain:

After a profitable trade, the decision to close trade and take profit on next trade depends on gains made on previous trade. A trader starts to think ” I’ve made enough on the first trade, lets not lose it all and give away all the profits. Take early profit and call it a day”. At the same time, on a losing position trader delay cutting losses and hold on to trades hoping that it will reverse. The result is that trader realize profits way too early while allowing losses to accumulate.

A professional trader just need to act opposite to typical human behaviour. By considering the impact of losses on net trading balance and not on recent history of trading , a trader can make right decision of letting a losing position go early while keeping the profitable position running. Trading Robots have this advantage over manual trading as they help avoid implications of trading psychology.

Another interesting aspect of trading is the impact of losses on our minds. The feeling of losing an amount is much worse than pleasure gained from winning the same amount. Hence traders, hate losing 10,000 more than they love winning 10,000. Psychologically losses have twice the impact, no wonder why a trader don’t want to close a loosing position and willing to risk more.

A good trader is not a trader who makes millions in fraction of a second. A good trader is one who know where to cut his positions. It is not about making money; it is about losing as less as possible when we are wrong. Thus managing the psychological asymmetry in risk-taking is the key for succeeding as a trader. Bottom line “An experienced trader stands out from a new trader not by how he makes money, but how he loses money”

What should you know about Forex Signals ?

Forex Technical Analysis

Forex Technical Analysis: 

Technical analysis is a method widely used in stock markets and other traditional markets. They use price history and a series of algorithms in their attempt to predict future prices. You can find on the market different methods and algorithms for predicting the market’s price, but in the end they will always base their methods on past price movements. Technical analysis, however, is a bit different.

The first method used by technical analysis is using the technical indicators. Usually a technical indicator is nothing more than a graphical representation display somewhere on the screen. Usually, the price is represented. The most notorious example is the MACD indicator.

Other methods can use measure resistance and support or trend lines. These methods are based on analyzing the chart and observing the recent history. The method is trying to find a pattern for price movements. Usually the price either follows a certain pattern or it oscillates between a minimum and a maximum. If the price follows a pattern, you can predict where it will go by using trend lines. If it bounces forth and back between a minimum and a maximum then using resistance and support lines you can predict when it will change its direction.

Technical analysis can be very helpful but its predictions are not flawless. Only you can decide if to trust a technical analysis and make a trade or wait for another opportunity. On the market you can find a wide variety of indicators and technical tools. Since most traders have access to them, the slightest difference in interpretation can make a huge difference on transactions. If some traders want similar price range and they all try to buy at that point then the price can bounce quite drastically in a short period of time.


Technical analysis is different from one trader to another. Each individual has its own desires, needs and interpretations. Every trader has its own goals too, so they have different ideas about how these goals can be reached and how to set up their indicators. All these differences make the individual’s trading system. Take any number of traders and you will see that, even if they use similar tools, the results will never be the same. The current market still works only due to all these differences.

For forex trading technical analysis is quite useful. It will only show a small part of the market but you can learn a lot about trading from it. Understanding technical data will help you read the charts better and you will develop certain skills and thus you will see faster when a price movements appears.

Technical Analysis

Technical analysis refers to the study of indicators and charts in order to determine the future price movement based on the past price variation. The technical analysis is quite different from fundamental analysis, since technical analysis uses mathematical techniques and charts to examine different aspects of price movement. Due to the development of Internet, all these indicators and charts are widely available to every user connected to the Internet, and not just for professional traders and brokers, like was in the past.

Charts will give you plenty of information about any price movement regarding a certain currency, if you know how to read them. Most traders consider that a chart tells the story of the currency it represents. Since there are more than 50 technical indicators you, as a trader, can get access to a huge amount of information about currency movement. From any historical analysis you can predict the future movement of that currency.

A good trader will certainly search a trend line. Trend lines always show the price movement of a certain currency (down or up). If you can find a trend, then you can determine quite accurate the price movement. A trend is always a good friend in this type of business, and all traders rely on them for future price predictions.

Technical indicators are used to study some particular aspects of a certain currency. These indicators are quite similar with the well known economic reports since they study the movement and health of a currency in comparison with economic reports that study the growth and health of a certain economy.

Source: http://www.tradingforex.net/lesson-6-forex-technical-analysis

What should you know about Forex Signals ?

Six steps to improve your currency trading: Third step

step 3 Choose Your Approach

There are two basic approaches to analyzing the Forex market. It is important to understand how they can be used successfully.

Technical Analysis

Technical Analysis focuses on the study of price movements, using historical currency data to try to predict the direction of future prices. The premise is that all available market information is already reflected in the price of any currency, and that all you need to do is study price movements to make informed trading decisions.

The primary tools of Technical Analysis are charts. Charts are used to identify trends and patterns in an attempt to find profit opportunities. Those who follow this approach look for trending tendencies in the Forex markets, and say that the key to success is identifying such trends in their earliest stage of development.

Fundamental Analysis

Fundamental Analysis focuses on the economic, social, and political forces that drive supply and demand. The premise is that macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment can be used to make informed trading decisions. Information about economic data can be found using XE Forex News, which is free to use.

There is no single set of beliefs that guide Fundamental Analysis. Different traders look to different indicators, and weigh various indicators in different ways.

What should I use - Technical or Fundamental Analysis?

Traders using Technical Analysis follow charts and trends, typically following a number currency pairs simultaneously. Traders using Fundamental Analysis must sort through a great deal of market data, and so typically focus on only a few currency pairs. For this reason, many traders prefer Technical Analysis.

In addition, many traders choose Technical Analysis because they see strong trending tendencies in the Forex market. They look to master the fundamentals of Technical Analysis and apply them to numerous time frames and currency pairs.

Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

http://www.xe.com/currencytrading/improve.php

What should you know about Forex Signals ?

What is Currency Trading?

What is currency Trading? Is it same as Forex Trading?

Currency trading can have a couple of meanings. If you want to learn about how to save time and money on currency transfers, visit XE Trade Money Transfers. These articles discuss currency trading as buying and selling currency on the foreign exchange (or "Forex") market with the intent to make money.

How Forex Works

The currency exchange rate is the rate at which one currency can be exchanged for another. It is always quoted in pairs like the EUR/USD (the Euro and the US Dollar). Exchange rates fluctuate based on economic factors like inflation, industrial production and geopolitical events. These factors will influence whether you buy or sell a currency pair.

Example of a Forex Trade:

The EUR/USD rate represents the number of US Dollars one Euro can purchase. If you believe that the Euro will increase in value against the US Dollar, you will buy Euros with US Dollars. If the exchange rate rises, you will sell the Euros back, making a profit. Please keep in mind that forex trading involves a high risk of loss.

Why Trade Currencies?

Forex is the world's largest market, with about 3.2 trillion US dollars in daily volume and 24-hour market action. Some key differences between Forex and Equities markets are:

1. Many firms don't charge commissions – you pay only the bid/ask spreads.
2. There's 24 hour trading – you dictate when to trade and how to trade.
3. You can trade on leverage, but this can magnify potential gains and losses.
4. You can focus on picking from a few currencies rather than from 5000 stocks.
5. Forex is accessible – you don’t need a lot of money to get started.

Why Currency Trading Is Not For Everyone

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, it is advisable to seek advice from an independent financial advisor.

Source: http://www.xe.com/currencytrading

What should you know about Forex Signals ?