Forex Gambling Mentality Kills Profits

Posted March 29th, 2010 by Rapid Forex 17 Comments »

Every forex trader understands that we need to use basic forex money management to be successful at forex trading online.

This mentality caused a winning series of trades (60% success) to lose 700% of a forex trading account that should have gained 520%. Read this post to see how a profitable forex trader can still lose so much money, and how you can prevent this from happening to you.

Confession: This trader was me a few years ago when I got started trading forex online. I’d be willing to bet something like this has happened to you…

Why is Money Management important?

It prevents what I call the “Forex Gambling Mentality,” when you see how this can turn online forex trading PROFITS into LOSSES, hopefully you’ll beat this dangerous way of thinking forever.

What is the Forex Gambling Mentality?

When you follow impulsive decisions to determine the amount of risk you take on a forex trade, you are falling into the Forex Gambling Mentality. Anything outside of a predetermined money management strategy is considered a forex gambling mentality.

Let’s look at an example:

  • You enter trade #1 and risk 10 pips to make 10 pips. The trade succeeds and you make 10 pips!
  • You enter trade #2 and risk 10 pips to make 10 pips. The trade succeeds and you’re now up 20 pips!
  • You are felling good, so on trade #3 you risk 20 pips to make 20 pips.  The trade succeeds and you’re now up 40 pips!

At this point you’re feeling like you’ve mastered forex trading. You get out your calculator and start figuring out that at this rate of compounding your forex trading profits you’ll have $2.5 million in your online forex trading account in about 9 weeks (TRUST ME – I’ve actually thought this way, and you probably have to).

You are now cocky and you start trading again, since you’re on a roll you decide to trade more lots to make more money faster.

  • You enter trade #4 and risk 40 pips to make 40 pips. The trade fails and now you are at breakeven!

You’ve still been successful 3 out of your last 4 trades, so you do another trade:

  • You enter trade #5 and risk 40 pips to make 40 pips. The trade fails and now you are down 40 pips!

Now you get nervous and decide to be more conservative, so you go back to what was successful for you in the past:

  • You enter trade #6 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 30 pips!
  • You enter trade #7 and risk 10 pips to make 10 pips. The trade fails and you’re down 40 pips!
  • You enter trade #8 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 30 pips!

You now look at your past 8 trades. You think to yourself  “I’ve been right 5 out of 8 times, or 62.5% of the time.  I’ve been allowing my emotions to control me. I need to stick to my plan. If I just risk 20 pips to make 20 pips, I’ll be successful.”

So you do the following:

  • You enter trade #9 and risk 20 pips to make 20 pips. The trade succeeds and you’re only down 10 pips!
  • You enter trade #10 and risk 20 pips to make 20 pips. The trade fails and you’re down 30 pips!
  • You enter trade #11 and risk 20 pips to make 20 pips. The trade fails and you’re now down 50 pips!

You’re down 50 pips, so you look at what you’ve been doing to try to analyze patterns and stop making the same mistakes. You’re not too worried yet, so you notice the following. You’ve still been right 6/11 times. You also notice that you’ve never had three failing trades in a row. Since you just had two failed trades, now’s your turn to put the odds in your favor. So you decide to go for breakeven and risk 50 pips to make your money back:

  • You enter trade #12 and risk 50 pips to make 50 pips. The trade fails and you’re now down 100 pips!

Now you feel like you’re having bad luck and aren’t going to risk any more money wildly. You’re still in the game and you know you can still make money with trading forex online, so you go back to risking 10 pips and the following happens:

  • You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 90 pips!
  • You enter trade #14 and risk 10 pips to make 10 pips . The trade succeeds and you’re only down 80 pips!
  • You enter trade #15 and risk 10 pips to make 10 pips . The trade succeeds and you’re only down 70 pips!

STOP! END OF EXAMPLE

It doesn’t seem right that a forex trader who is profitable 9 out of 15 times (60% of the time) could lose so much money trading forex online. This is the same reason that compulsive gamblers lose money, they don’t follow basic forex money management of trading only 2% of their account per trade. By doing this the forex trader gets to be more profitable. This is what forex losers do.

A forex winner who is free of the forex gambling mentality would have had the following experience (with the same trades):

  • You enter trade #1 and risk 10 pips to make 10 pips. The trade succeeds and you make 10 pips!
  • You enter trade #2 and risk 10 pips to make 10 pips. The trade succeeds and you’re now up 20 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

  • You enter trade #3 you risk 12 pips to make 12 pips.  The trade succeeds and you’re now up 32 pips!
  • You enter trade #4 you risk 12 pips to make 12 pips.  The trade fails and you’re still up 20 pips!
  • You enter trade #5 you risk 12 pips to make 12 pips.  The trade fails and you’re still up 8 pips!

You notice that your account size has shrunk & you can now only safely risk 10 pips to make 10 pips.

  • You enter trade #6 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 18 pips!
  • You enter trade #7 and risk 10 pips to make 10 pips. The trade fails and you’re still up 8 pips!
  • You enter trade #8 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 28 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

  • You enter trade #9 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 40 pips!
  • You enter trade #10 and risk 12 pips to make 12 pips. The trade fails and you’re still up 28 pips!
  • You enter trade #11 and risk 12 pips to make 12 pips. The trade fails and you’re still up 16 pips!

You notice that your account size has shrunk & you can now only safely risk 10 pips to make 10 pips.

  • You enter trade #12 and risk 10 pips to make 10 pips. The trade fails and you’re still up 6 pips!
  • You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 18 pips!
  • You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 28 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

  • You enter trade #14 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 40 pips!
  • You enter trade #15 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 52 pips!

You notice that your account size has grown & you can now safely risk 14 pips to make 14 pips.

Would you rather be up 52 pips, or down 70 pips?

This is the difference between the Forex Gambling Mentality and Basic Forex Money Management.

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17 Responses to “Forex Gambling Mentality Kills Profits”

  1. Preston JonesNo Gravatar Says:
    March 29th, 2010 at 8:23 pm

    I know what you mean. Every thing you read about forex trading online tells you to equity management. Your the only one who has showed me the right thing to do, and the pitfalls of not doing it!

    I think this has been a good idea that a lot of people have been just saying because it sounds good. Thanks for showing us what not to do so we don’t get burnt & having the courage to admit when you did stupid stuff too.

    Peace & Blessings,
    Preston

    [Reply]

  2. Marlon ThomasNo Gravatar Says:
    March 29th, 2010 at 8:26 pm

    It never occurred to me that you could lose money if you were successful at your trades 60% of the time!

    This example was fairly simplistic, it would have been good to see the example in dollars. Perhaps you could include this in a follow up blog post.

    I’m interested in knowing more .

    Marlon

    [Reply]

  3. Ralph MeadowsNo Gravatar Says:
    March 30th, 2010 at 3:31 am

    I was a compulsive gamlber back in the 80′s before getting my act together. I remember going through that EXACT logic, only I was betting on football games. Even the professional gamblers (the ones who make money) have a non-emotional system for managing the sizes of their bets. Thanks for sharing this analogy as it’s helpful for me.

    Thanks,
    Ralph

    [Reply]

  4. DannyNo Gravatar Says:
    March 30th, 2010 at 12:04 pm

    I’ve been reading some Van Tharp stuff these days that said the same thing. I think position sizing is way undervalued compared to entry and exit strategies. Thanks and keep’em coming!

    [Reply]

  5. Terry ButlerNo Gravatar Says:
    March 30th, 2010 at 3:34 pm

    This post shows how the forex gambling mentality can turn a 60% winner into a loser. Imagine what would happen if you’re only 40% successful in your trades as many forex traders are only right of the time. This would be a real disaster!

    If you follow the right money management system, you can be profitable with something like a 40% success rate. It flips your example Brian & it can also turn a loser into a winner!

    Cheers,
    Terry

    [Reply]

  6. KevinNo Gravatar Says:
    March 30th, 2010 at 7:05 pm

    Terry has a good point, what would happen if you weren’t 60% successful on your trades? I’d love to be at that point, but I’d be lucky to hit 40% success, and of course I’ve been losing. I’m interested in learning how to tighten things up to turn my failures into successes with forex trading.

    Thanks ~ Kevin

    [Reply]

  7. aidilazharNo Gravatar Says:
    April 12th, 2010 at 3:03 am

    Hey Brian,

    I’ve read ur articles and its impress me.. you know why? because that is me..yeap..no kidding.. exactly me last last February 2010.. now ive learned my mistake and do a proper trade plan with proper money management i guess :) coz know i dun greedy anymore.. every morning i trade all according the plan .. and yes.. it changed my trading result a lot. Thanks for posting memoirs of my trading…hahahaha

    c ya soon..

    br,
    aidil

    [Reply]

    Rapid ForexNo Gravatar Reply:
    April 12th, 2010 at 1:18 pm

    Aidil,

    That’s funny :) I think that lots of people can relate to this because it’s a common way of thinking that makes you lose money from forex trading. Thanks for letting us know that you’ve managed to preserve more of your profits by quitting some of these habits.

    [Reply]

  8. PraneetNo Gravatar Says:
    May 6th, 2010 at 10:12 pm

    Hey Rapid Forex,
    Yes I certainly can relate to it, just today I got burned $3000+ overnight and definately have learned a lot overnight. I realised as you have mentioned in your article elsewhere I need to educate myself, build a trading plan and use it and the other is if I don’t see a clear signal I should stay out and definately stop-loss which I never seemed to place.

    I was suppose what you would term a forex gambler I was lossing and gaining in forex over since I started trading in Feb 2010 but never rectified my error as what I was lossing I was making a bit of it back, but not until today when overnight I lost so much. From now on I plan to educate myself. Thanks a lot your website is a good starting point for me to educate myself about forex.

    [Reply]

  9. RobNo Gravatar Says:
    May 9th, 2010 at 2:49 pm

    Aloha Brian,

    I had to laugh at this one as it’s a perfect description of where I’ve also been. Fortunatley I will credit myself to have had the good sense to use small bets (spreadbetting is free from CGT in the UK but you probably already know that)so the damage was some what limited.

    I came to realise that there is no such thing as a free lunch and that forex trading requires learning, constant discipline and patience to build ones account. The rewards and the freedom on offer for a successful trader have given me a burning desire to master it.

    All the best.

    Rob

    [Reply]

  10. Karl TNo Gravatar Says:
    May 11th, 2010 at 5:49 am

    I’ve been here sad to say. Sometimes even knowingly – with the strange thought that THIS time, things will be different and I WILL make back all that lost money in one full swoop.

    But guess what… the story always ends the same. Only now you’re in a hole twice as deep.

    [Reply]

  11. TonsNo Gravatar Says:
    May 11th, 2010 at 10:25 pm

    Hi
    Nice trading but when do 8pips grow to 28pips with a 10pips profit ? and how do 6pips grow to 18pips with 10pips profit ?
    You should wait and find heigh potential trades where your target is at leest 1 times your stop. I go for 2 times my stop so with 10pip stop i go for 30 and break even at 10. If my tade loose momentum at 25-29 i take profit at 20 Else i let it break even.

    [Reply]

  12. RegitNo Gravatar Says:
    May 13th, 2010 at 1:32 am

    @Tons-You grow from 8 pips to 28 pips with a single 10 pip profit ONLY ON PAPER! LOL Wasn’t it obvious to you that it was a mistake and the result should have been 18 pips? In any case, it changes neither the spirit nor the valididty of the example. Put in any numbers you like and run your own scenario; the point is the same whatever numbers you use.

    [Reply]

  13. EliNo Gravatar Says:
    May 17th, 2010 at 9:21 am

    Hi,
    This example is amazing!!!

    continuing what Tons says, there are two minor mistake here: 1. the grow from 8 pips to 28pips, and the doubling trade #13. the final number for the forex winner is 26pips gain.

    again, great example!
    i’m going to print it, so it alaway be infront of my eyes, hoping in tough moment not doing a mistakes.
    Thanks again
    Eli

    [Reply]

  14. LarryNo Gravatar Says:
    May 28th, 2010 at 5:45 pm

    Wow! This article showed me that I made the same mistake in the past.

    Do the same percentage of risk stay the same even on a mini account and if leverage is lower like 100:1?

    Do I trade nano lots and use the same 2% rule?

    Thanks

    [Reply]

    Rapid ForexNo Gravatar Reply:
    May 28th, 2010 at 11:34 pm

    Larry – you can use different leverage. It’s just important that you follow the 5% rule. What I’d normally recommend is 5% for a sail & 2% for a surf. I’ll be teaching more about this in the bootcamp (full details announced tomorrow).

    [Reply]

  15. Baghdad Bad BoyNo Gravatar Says:
    September 2nd, 2011 at 11:12 pm

    yep been there seen it done it….now stick to it rigoursly

    [Reply]

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