Trading attracts newcomers due to the potential immediacy of its rewards. Brokersadvertise incredible returns almost immediately. The reality is a little different and losses are both just as likely and more frequent.
Many people think that it’s enough to fund an account with a chosen broker and dive straight into the world of trading without any prior knowledge or experience.
The temptation of immediate reward makes them impatient and they don’t want to waste time on elementary knowledge and acquire basic information.
They want profits here and now.
Such an approach often leads to over-trading, speculating without a plan. This is simply a reliance on the law of averages. This article will concentrate on the premature closing of a position.
Delaying gratification could be the cure for this impatience.
Delayed gratification creates self-control. It is the action of not immediately expecting to receive a reward for an action.
In the above case, such action would be to refrain from closing the transaction until it triggers a stop loss or take profit level that has already been determined no matter what the temptation to take a profit. This leads to a disciplined trading mentality.
Many people have problem with immediate gratification. When their position is showing a profit, they close it prematurely, before it has reached the take profit level, thus not giving the market time to work for them.
Adding profit to your accounts gives satisfaction, but succumbing to temptation limits your profitability, and thus impairs the risk to reward ratio, which is a key element of money management in trading.
Temptation is a natural reaction from our childhood. In the 60’s Professor Walter Mischel of Stanford University conducted a study, which was called “The Marshmallow Test’.
Children received a proposal to eat one sweet marshmallow immediately or could wait 15 minutes in a room and in reward receive two foams. When the child undertook decision to wait, the professor left the room, and the child was left alone with sweet. At any time, the child could ring a bell, which would summon the professor, and the child could then enjoy the marshmallow. Unfortunately, they didn’t receive the second one.
A similar experiment is illustrated in the following video:
We behave the same way while controlling our trades!
Hesitation, maybe I should close it since it is profitable. What when the price turns against me?
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.
This comes more easily with experience where “patience is a virtue”.
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 sweets.
You may think, after all those are only children and what this has to do with us adults, or, for that matter, to trading.
Well, it was not the end of the study. After several years, the Professor examined his clients in terms of how to cope in life. It is not surprising that children who were sufficiently patient to wait for the other sweet were more successful in life and acquired and used knowledge more effectively.
Deferred gratification should also be applied to trading, even if we give it a different name.
Not only will it result in your transactions teaching potential, take profit (TP) or stop loss (SL), but longer term there is a greater chance of profit; for two reasons. First, the transaction will be given space to improve its risk/reward ratio, and secondly, give losing positions ‘an opportunity’’, since it often happens that the price moves against the trader, only to return
to a more favourable direction.
Psychological comfort is derived from adhering to the original strategy and it defies logic to “break the rules” we have set for our trading performance.
It may be useful for the novice trader to set a specific set of rules to avoid instant gratification. These may be useful guidelines:
- After taking a position and setting its parameters, use a set and forget rule to give it time so it can work.
- Wait until the time you have prescribed to check on progress. Do continually re-evaluate or second guess yourself.
- Use MT4’s CTRL+T function to close the trading window. Out of sight is out of mind!
- Use Expert advisors (more about them in a different tutorial) to manage the position
- Think long term. Every trade is a part of your whole strategy. Try not to think of each one individually