Last night pretty much went the way I thought it would..I did not trust the gbp/usd and I was proven right. I decided to take the nzd/usd and it put me in the hole for over 100 pips. I have told many of you that I don't like stops except to stop catastrophic events, so at that point I put my psychological stop into place (will explain in a moment). As I am writing this I am now only in the hole 20 pips. I will now wait to see what the forecast brings and decide whether or not to bail.

So what is this psychological stop I am referring to. For me, it is what level of pain I am prepared to endure. I have my own philosophy on risk reward. If you have followed along this blog, you will know that it does not follow conventional wisdom. Forex conspiracy theorists are convinced that brokers stack the playing field against you. They surmise that during major news events they widen the spread, delay your order etc. They surmise that they are slow to update the ticker. (I have actually had a difference of nearly 20 pips between 2 brokers at the same time during a news event). They surmise that they hunt stops. How often have you had a stop spiked out only to see a dead trade quickly move back to profit?

So who am I to buck these theorists. I decided to understand the rules of engagement. I try not to trade during news events, and I refuse to tip my hand with a stop. Now I am not advocating flying by the seat of your pants, that would be just stupid trading and a recipe for disaster. But what I do is avoid the herd. The herd contributes to a self fulfilled prophecy. The herd place their stops all clustered around the same targets, be it Fibonacci levels, trend lines, double zeros etc. what a perfect place to hunt for stops.

So how do you protect yourself. Well, even before we talk stops we must start at the beginning. First of all, don't trade with money you can not afford to lose. Do not beg, borrow, steal, credit card, credit line money, money manage friends etc. If you have to play with demo money for a year and give up Starbucks everyday to save your seed money , then do it. Treat demo money like real money (very tough to do) and learn your trade and hone your strategy.

Next I divide my money by 10 losing trades. I have such confidence in the forecasts, that I feel, with a disciplined strategy I will take some losses, but over a level of time (1 month, 3 months, 6 months, 1 year) I will come out ahead.

I enter trades using anywhere from 3 to 8 % and try not to over trade. I do not use the same account for different trading strategies. For instance, I use the Forecasts primarily for day trading (although I will hold on to a trade if it has not broken my psychological stop). And will not enter another trade in that account until there is some resolution.

I would use a separate account for different strategies. If I feel there is an opportunity for a long term trend trade, I will use the range of the Forecasts and move my psychological stop accordingly. (I like to take interest paying directions for long term trades so I am getting daily interest while building equity).

And I try and be a positive thinker when I am trading. (sounds silly!) I am a golfer for instance. And if I am playing a course that I have never played before I hate when my playing partners identify all the trouble for me before I shoot. All I care about is where I want to be. If they tell me where the trouble is I will find it. Its the old "...Tree? what tree?" as your ball is sitting at the trunk! I feel the same way about improperly placed stops. I really feel if you place a stop, it will get hit.

So if you made it this far you are wondering what is this "Psychological Stop". Well, I enter each trade with a set goal in mind of how much I am going to profit, and what level of pain I am prepared to take if things go south. Trouble lurking is a given, and when I place my stops it is outside the normal day range of that given pair. Yen pairs are much wider ranges than the swissy for instance. And I am only using stops for insurance to prevent getting rolled over by an unforeseen event. If I should lose, then I stand back and wait until the next day forecast, and make a very tight trade for profit (15 - 20 pips) to get that winning feeling again.

Using this strategy, it has been quite a while since I strung a series of losers together.