Order Flow Emotions

Originally posted at forexfactory on April 6, 2011:

Well, you need to ask yourself does the market move 5-7 pips in your favor mean that you need to move your stop (physical or mental) to breakeven or closer to your entry point?

Does your system tell you that if the market moves 5-7 pips, you should move your stop to breakeven or closer to your entry?

The thing that probably happens is that, you see the trade go in your favor and that causes certain scenarios/emotions to play out in your head. Perhaps you think of all the money you can make, or all the pips you can make, or that great this is a good trade and it should not come back because you finally caught the bottom to the pip on this trade. Or you think to yourself that this is the trade is going to go in my favor and explode in this certain direction and never retrace. I suppose something like that may be going through your head.

On the other side when the market drops very quickly and you are in drawdown, it can cause the following emotions to come into your mind and body. What if this is the trade where the market finally hits my stop loss so I should bail out early and only take this small loss instead of a full loss. Perhaps you see a certain pattern play out unrelated to your system and say I saw this and this pattern and that can cause my trade to hit my full stop loss, so I should bail out now, even though that pattern is not related to your trading system. You may be asking yourself why is the market in drawdown for so long? Am I missing something? Why isn’t the market moving into my favor. Is the market going to hunt my stop and then go in the direction that you thought it was? I suppose something like that may be going through your mind.

Now the ideal trader mindset would be something like this I believe:

You find the entry criteria and place the trade. You set your stop loss. You have rules in your system that state when to move the stop to breakeven, or move the stop to lock in profits, etc. Only when those conditions are met do you exit your trade, or move your stop. Now you may say, well I want to flexible and thus don’t need rules! Well thats kind of the problem. You need some sort of framework/rules that you tend to follow.

Yes order flow trading can be a heavily discretionary trading system, but that doesn’t mean you cannot establish some rules to guide you along.

Will there be certain situations when the market goes 5-7 pips in your favor, then goes into drawdown and continues to give you a full loss, and you would of been better off taking the premature loss instead of the full loss, absolutely that will happen. But in the beginning you probably do not have that type of discretion developed to do that successfully. So the more likely scenario would be that you choose to bail out of the trade prematurely and the market decides to explode in your favor and if you did not do that, you would of ended up with a killer trade that made back all of your losses and then gave you a killer profit on top of that.

The market moving 5-7 pips can be caused by an infinite amount of things, most of which is noise. I used to bang my head against the wall trying to figure out the smallest 5-10 pip movements of price and explain them. Eventually that was a lost cause. A lot of pain and frustration. So I would generally recommend you focus on trades with at least 15-20 pip profit potential, and at least 15-20 pip stops. Even that might be a tad too low.

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