Why did You Close The Trade Too Early?

Imagine you're an experienced chef, preparing a special dish for important guests. You've carefully prepared the recipe, selected the finest ingredients, and meticulously followed each step. The tantalizing aroma fills the kitchen, a sign that the dish is almost ready to be served.

But suddenly, you hesitate. You fear the dish might be overcooked, that the taste won't meet expectations. You panic and hastily turn off the stove before the dish is fully cooked to perfection. The result? A potentially delicious dish ends up undercooked, losing its full flavor potential.

This is a metaphor for "closing trades too early" in forex trading. You have a well-thought-out plan, a clear profit target, but the lure of small profits or the fear of losses makes you rush to close your position before reaching your predetermined target.

Don’t Close Trades Too Early

Closing a trade too early means exiting a trading position before reaching the profit target specified in your trading plan. This is often driven by emotions like fear (of losing small gains) or greed (wanting to quickly enjoy small profits). It might not sound like a mistake, and you might think, "What's the problem? Isn't the most important thing the profit, no matter how small?"

The forex market is complex, and we all know that market movements are driven by fundamental factors like a country's economic conditions, monetary and economic policies, and even socio-political events. The problem is, even though we know the causes, we never know for sure where the price will go, where it will reverse, or whether it will trend or move sideways. What we do is speculate based on patterns from the past.

For example, when the Fed raises interest rates, the USD usually strengthens, so we decide to buy USD/CAD, USD/JPY, USD/CHF pairs and sell GBP/USD, EUR/USD, and so on. But does the USD always strengthen when the Fed raises interest rates? Not always. In June 2018, the Fed raised interest rates, but the dollar remained in a bearish sentiment. However, often when the Fed raises interest rates, the US dollar strengthens, and we use this pattern to predict price movements of pairs with the USD.

Since the forex market is difficult to understand, the only way to make a profit is to consistently follow patterns that frequently occur (like when the Fed raises interest rates, the USD strengthens). For instance, in recent years, the Fed has issued 10 policies related to interest rate hikes. Among them, 8 resulted in USD strengthening, and 2 did not change the situation (USD remained weak). If we consistently buy when the Fed decides to raise interest rates, we will successfully profit 8 out of 10 trades.

Closing trades too early, even if it results in profit, is an inconsistent action. Initially, we plan our trades carefully, determining entry and exit points, but in the end, we don't follow the plan and choose to close the trade early. Returning to the previous example, we have successfully made a profit 8 out of 10 times when the Fed raised interest rates. If the USD typically rises by 200 pips when such a policy is taken, and we create a trading plan with a profit target of 150 pips, but in practice, we only take a 30 pip profit because we're afraid the price will reverse, isn't that a waste? The Fed doesn't raise interest rates all the time, and it has a high probability of success, but we take very low profits just because of fears that may not even happen.

What Should You Do to Avoid Closing Trades Too Early?

Closing trades too early is a mental issue. Traders with weak mentality tend to be afraid when facing changing market situations that could potentially lead to losses. Therefore, the only way to strengthen a trader's mentality is to increase their trading experience. The more experience someone has in facing dynamic trading situations, such as alternating profit and loss situations and other situations, the stronger their mentality becomes.

Of course, this is not an ideal solution. First, it takes a long time, and the longer, the better. Second, it requires a large amount of money, because with a weak mentality, traders are more likely to lose than to make a profit.

But don't worry, there's another way. If your mentality is not strong enough to face the market, then don't face it. Run away, divert your attention from the market, and let the market determine whether you will profit or lose. I mean, use the stop loss and take profit facilities provided on the trading platform, then let your trading plan determine the outcome. Don't sit in front of the screen and monitor market movements, it's useless, it will only make you doubt the trading plan you've made. The market moves because of the fundamental factors behind it, not because you're watching it.

#OPINIONLEADER#