Have you ever ignored a small loss, resulting in a larger and larger amount of loss, and finally be deeply trapped or even out of the end.
This phenomenon is called the “broken window effect.”
Broken window effect refers to the negative impact A in A system, which will have a chain reaction and bring more negative effects B, C, D……
And so on, eventually causing the whole system to crash.
The performance of the broken window effect in the trading field is that traders do not pay attention to a loss, but allow themselves to continue to make mistakes, resulting in increased losses, and finally start to break the pot, operation more and more random, and their accounts are more and more irresponsible.
It ended up sinking deeper and deeper into the red.
It is because of the “broken window effect” that an inexperienced trader can make more money than a trader with deep losses.
The Broken window theory actually reveals a kind of psychological inertia, once your account is deep in the red, there will be a kind of break the pot psychological, thinking that you have already lost so much, a little more is acceptable, in case the time to run the money back?
We should pay more attention in the usual trading, do not easily break your “money window”.
In order to avoid the broken window effect, traders should pay attention to the following four points: first, don’t break your “money window”, the so-called “money window” is to try not to let your trading account have a large loss, many people will be in the loss of the road deeper and deeper unable to extricate themselves, is because of breaking the “money window”.
Once you have a big loss on your trade, don’t hesitate to walk away from it, and don’t worry about how to get your money back.
It’s best to set up a stop yourself in advance.
If you are a big loss after floating gains, then your stop loss point should at least be set above the break-even price, the purpose is to not let their already profitable position into floating losses, and eventually be deeply trapped.
At this time, we may encounter the situation that the price rises again after the break-even price is closed.
Fear of missing out on such an opportunity is also why many people are reluctant to cover their losses.
This is a natural worry, but if you want to protect your “money window” from being broken, then it should be abandoned. The last thing in the market is opportunity, and for most people, the last thing is money.
At this time, it is not wise to use limited funds to get numerous opportunities that will appear in the future.
In case the “money window” is accidentally broken and the trader has a large loss, the best way to stop the loss is to stop the operation decisively, and do not think of carrying the single shoulder to recover the capital.
This is especially true when it comes to investing in the stock market, where many believe that stock market declines are temporary and that the lack of leverage makes investors more comfortable holding on to their money until the day they get it back.
But there are plenty of people who end up stuck in deep traps for years.
The right thing to do is to temporarily leave the market, find out the root cause of their mistakes or losses, and timely adjust the mentality.
We should remedy the loss of this window at the first time. We should not allow it to develop. We should repair how much the window is broken.
Traders must wait until they have fixed that window and adjusted their mindset before re-entering the market.
Third, resist the temptation of bad trading signals trading should adhere to the right concept and direction, adhere to their own trading system, do not be induced by some bad signals in the market.
For example, the recent bull market in A-shares and the recent surge in gold may be inducement signals, inducing investors to blindly follow the trend, or even blindly chase higher.
The result of blind approach is often A large loss or deep trapped, whether A share nearly two weeks a callback or last week’s spot gold callback, I believe that there are a lot of investors feel the kind of desperation and regret to buy in the “mountain top”.
The most terrible thing is that this blind entry will also amplify the broken window effect, leading to investors’ losses are getting bigger and bigger, and finally just break the can break the break.
Some popular investments are easy to follow, especially in the stock market.
When a stock has a good run, many investors tend to follow it recklessly, only to regret it when it crashes.
Therefore, investors should make the right investment choice according to their own actual situation and market situation.
Fourth, control the trading mentality According to the Broken Windows theory, a trader’s wrong behavior may be gradually amplified, and the trading mentality will be gradually unbalanced due to a failure or severe loss.
To take a simple example, a trader who is new to trading or has never lost a large amount of money in trading tends to be more cautious and less likely to make a big mistake.
But once you experience a big loss, if you don’t adjust your mindset and trading strategy, you can have a series of even bigger losses in the course of the next trade.
Therefore, the trader must keep a good attitude and look at the loss in the trade rationally.
Of the above four points, we should pay particular attention to the third one, because the market often uses the “broken window theory” to induce investors.
In the stock market, for example, the “broken window theory” is often used by the banker to induce retail investors.
For a simple example, when a stock falls, or falls below a certain key position, as long as the dealer does not protect the stock, then blindly follow the investors will be induced to sell, and the final chips are picked up by the dealer.
Of course, dealers can also use the same method to induce retail investors to chase up, and then take the opportunity to ship.
In addition, there is another kind of reverse window-breaking in the market, another kind of inducing behavior, which is more commonly seen in bear markets.
During a bear market, there are signals that lead investors to believe that the bear market is ending and to start piling in for a bull market.
It’s actually a hole, but many investors won‘t cut their losses and keep adding more and more until they can’t afford it.
In short, when a window is broken, if it is not repaired, more Windows will be broken later.
The right thing to do is to nip risks in the bud, not let them go.
The key is have you done a thorough review of your trading approach?
There is no one specific way for everyone in foreign exchange trading. You should treat all the knowledge you are exposed to with a skeptical attitude. Only self-review can keep you awake and then find a set of methods that work for you.
So you have to constantly review yourself. If you never do this, you may not even understand your trading habits. You end up repeating your mistakes again and again without realizing it.
It’s only a matter of time before we lose all our money.
Forex trading is more of a spiritual journey than an investment plan.
Come to the people calm, not through the people looking forward to.
Xiaobian hopes that everyone in the foreign exchange experience, do not waste time and energy on the above five things, as soon as possible to find a suitable for their own stable profit method.
