The temptation of immediate reward is one of the elements why trading attracts crowds of people. Partly this is due to brokers adverts and stories on Internet about how quickly you can multiply your capital by up to several thousand percent. It is a pity that no one mentions fact how quickly you can lose it, but that’s a topic for another article.
Many people think that it’s enough to fund brokers account and plunge into the world of trading knowing nothing about it. The temptation of immediate reward makes them impatient and they don’t want even to lose time for elementary knowledge and acquire basic information. They want profits now and here. Such an approach can lead to opening too many transactions (over-trading), to speculate without a plan, and for more educated premature closing position and enjoyment of a small profit or a small loss. It is on the premature closing position, I will focus in this text.
Delaying gratification, and therefore the inverse of immediate reward may be the cure for this ailment. It consists in choosing some action or reward after a certain time and is an important element of self-control. In the above mentioned case, such action would be to refrain from closing the transaction until it triggers a stop loss or take profit. Many people have problem with that, and when their position already has a profit closes it prematurely, before it reached TP, not giving the market time to work for them. Adding profit to your accounts gives satisfaction, but you succumb to temptation and limit your profit, and thus impaired is a risk to reward, which is a key element of money management in trading.
The title temptation is with us since childhood. Already in the 60’s Professor Walter Mischel of Stanford University conducted a study, which were called ‘ foam test’. Children received a proposal to eat one sweet foam (marshmallow) immediately or could wait 15 minutes in a room and in reward receive two foams. When the child undertook decision about waiting, the professor leaved the room, and it was left there alone with foam. At any time, a child could ring the bell, after which the professor entered, and it could then enjoy the sweet foam – unfortunately, didn’t receive the second one. A similar experiment you can see in the following video:
Don’t we behave the same way while controlling our transactions? You hesitate -maybe I should close it until profitable, and what when the price turns back ? Similarly, in the case of losing transactions when we do not give it ‘free space’ and close it before reaching the stop loss, enjoying that we lost less.
The experiment conducted by Professor Mischel demonstrated that only 3 out of 10 children were willing to defer gratification and as a result get two foams. You may think, after all those are only children and what this has to do with us adults, and in addition to trading. Well, it was not the end of the study. Professor after several years examined his clients in terms of how to cope in life. It should not be surprising that children who were enough patient to wait for the other foam reached later in life much more success and better assimilated knowledge.
Deferred gratification must be applied also in trading. Not only will it result in that your transactions will reach take profit (TP) or stop loss (SL), but looking at long term you have a greater chance of profits, and this for two reasons. First, the transaction will be profitable to improve the ratio between risk and reward, and secondly, give loss positions ‘place for breath’, as it often happens that the price returns against us, to the moment to move in a favorable direction. Apart from the above mentioned reasons, you should also pay attention to the psychological comfort and satisfaction with the adherence to your strategy, after all, when we close the position without logically justified reasons, we break the rules we have adopted at the time of its opening.
If you diagnosed oneself a temptation of instant gratification- following tips may be helpful in leaving your transactions in peace:
- After taking positions and setting its parameters, use the rules Set & Forget – give it time so it can work.
- Depending on the adopted interval, do not spend time to re-evaluate it until the moment when you have really planned to do it.
- If you are using Meta Trader 4 platform, use the shortcut ‘CTRL + T’ to close the terminal window and do not look for momentary gains / losses which bring your trades. In this way you do not help them or yourself.
- It may be helpful to use machine (Expert Advisor) to manage the open position.
- Think in the long term and do not focus on individual transactions. Be aware that only a series of transactions is really important and time works in your favor.