Trading Psychological Pitfalls
In order for me to do that, let’s create two fictional traders. Meet Jack and Peter.
Let me introduce you to Jack:
Jack is a professional trader. He makes all his money trading THE FOREX market. He has been trading for five years. He is patient, disciplined and in his trading he is fearless.
Let me introduce you to Peter:
Peter is a Newbie. He barely manages to break even with his trading. He has been trading for six months. Peter takes unnecessary risks as he is undisciplined and he panics when he takes a trade.
Moving on from the pleasantries….
Let’s imagine we have a super profitable system. On paper, traded mechanically, this system has an average of seven wins from ten trades or 70%. Now let’s imagine we give both Jack and Peter this method and they trade it.
What do you think will happen?
Jack will take the system, take the trades and make lots of pips. In fact Jack, will probably improve the efficiency of the system and bump it up to eight winners out of ten.
Peter, on the other hand, will take the system, take the trades and pretty much screw it all up. As I said, trading it mechanically will give Peter an average of seven out of ten winners. However, Peter will be lucky to get five out of ten winners.
But why does it work this way?
It all comes down to two things – psychology and experience.
There isn’t much you can do about experience as you can only acquire it through screen time and taking trades. So, let’s take a look at some of the dangerous Trading Psychological pitfalls. Hopefully after reading this, you will be able to see them coming and stop them before they destroy your account.
THE 4 TRADING PSYCHOLOGICAL PITFALLS IN TRADING:
1.THE DESIRE TO BE RICH:
The desire to be rich manifests itself in many ways. The main ways are fear and greed and they inevitably lead to other problems. If you think about it, the majority of the issues newbies have will originate from the desire to be rich. Things such as:
- Poor Money Management (risking too much as an example)
Trading the FX Market will not make you rich in the short-term. It will likely take a couple years before you are trading well enough to leave your day job. FX Trading is a career path for the long run. If you are successful, it can give you a very relaxed life. However, if you started trading last week and you plan to quit your job in six months, because you anticipate being rich enough to by a Ferrari, you are delusional.
This is a career, not a get rich quick scheme. If you want to get rich quickly, hit the casinos. You have a better chance of winning there.
2.FEAR OF LOSING:
From a young age, we are taught that money is important and that without money you have no real value. We are conditioned to believing that to be successful when we grow up, we must have lots of money.
This is because the reverse is also true. If you lose money then you are a failure as it is the opposite of making money. This in turn leads to some newbie traders being afraid to pull the trigger and actually take a trade.
Some newbies trade demo accounts for years, never summoning the courage to open a live account. Some newbie traders with live accounts panic whenever they enter a trade and in turn make rash decisions.
Take a look at people like Richard Branson, Alan Sugar and Warren Buffet. These guys are billionaires (or close enough to it) and each one of them has failed many times. Richard Branson has spearheaded many failed ventures. Did those failures set him back though? Hell No! The man is going to start flying people to space at $250k per head this year with Virgin Galactic.
I think losing some money to the markets is actually beneficial. It teaches you some very important lessons. What is damaging is the fear of losing money. The fact that you think about it, puts you at much greater risk of it actually happening. You have to trade with a positive attitude. So, get rid of those fears and worries, they will not do you any favor.
The truth is you are going to lose money to the markets. It’s unavoidable! Every professional trader has lost money. Not every trade will be profitable. The trade market simply doesn’t always work in your favor and there are times, especially as a newbie, that you will be stung. If you end up blowing your first live account, so be it. As long as you pick yourself up and try again, you will be a better trader for it.
3.THE NEED TO BE RIGHT:
This is a good one. Peter opens his platform and enters a dumb, baseless, long trade. He targets 100 pips and has a 50-pip stop loss. The trade goes against him immediately.
It goes down, first ten pips, then twenty pips, and then thirty pips.
When it reaches forty pips Peter decides he doesn’t want to lose another trade and moves his stop loss down.
The price keeps falling:
Eventually, Peter closes out his trade and he has lost a huge portion of his account. Does this sound anyhow familiar to you?
Peter was not able to accept that he had taken a losing trade. He kept pushing the stop down in the hope that it would eventually turn around. The need to be right is an account killer.
There are times when I move my stops, but these are in line with my RISK MANGEMENT targets and ATR’s for stop losses. In addition, sometimes during a “SQUEEZE” they are moved to accommodate the increased level of volatility.
This is the aspect of Forex Trading that is my own personal Achilles heel.
I saved this one for last because, even though it is one of the most common and dangerous pitfalls, it is rarely discussed. A trader who lacks discipline can never make it in this business. Many traders are guilty of lacking discipline for many reasons.
The main culprits are what I like to call “System Jumpers”. These are the traders that are constantly tweaking and changing their trading methods. These traders do not realize that learning to trade a system efficiently takes time.
System Jumpers are traders who lack the discipline to stick to and learn how to trade a system. They try it for a week and when it doesn’t work they jump to the next system or method.
Another common action of an undisciplined trader is abandoning a perfectly good trading method. Every trading method has periods in which it performs below average. No matter how versatile a method is, it cannot perform at peak efficiency in all market conditions. A true trader has the discipline to stick it out through hard times.
Despite the fact that today we haven’t placed any trade idea or strategy and therefore no charts in this article, what you need to understand is that sometimes trading is not only about making money. In fact, trading has nothing to do with making money. You need to learn to take good trades. The money will be part of it in the end, but it is much more important to learn about knowing yourself and having good ideas to take good trades. The psychology of trading can be applied to anything other venture in your life.
Hopefully, you have enjoyed today’s article as much as I have enjoyed writing it for you to read. See you in the next one.
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