Whether you’re a beginner or someone who’s been around for some time, where there is money involved your psychological approach can make all the difference.
We’ve compiled a list of 10 psychological approaches that can hurt your trading career in the long run. These are just some attitudes and ways of thinking that you should look out for.
1 Underestimating the process
A lot of traders when they’re starting out expect to be the exception to the rule- the rule that says that not all trades are going to be profitable and you will not become an overnight millionaire.
Don’t underestimate the process. Trading, when it’s sustainable and profitable for a long period of time, is a slow grind. Even the traders who are very successful face losses. And there is a 100% chance that you will too.
2 Becoming emotionally involved
Getting too emotionally involved with a trade would mean that you’re not thinking with your mind anymore but your heart. Learning to remain objective ensures that you make intelligent decisions. Emotions can shade your judgment.
Also, entering trades for emotional reasons doesn’t help anyone. And this brings us to our next point
3 Revenge trading
Sometimes the trader, after facing a loss, will have the urge to enter a trade with the same pair in the hope of making a lot of money or making back the money they lost.
The currency doesn’t know who you are or that you’re taking revenge on it. You’re doing it just to satisfy yourself. Don’t throw everything you know about trading out the window just to make yourself feel like you didn’t lose.
Instead, try to take a step back and understand that it’s just one trade. There is plenty of fish in the sea. Long term success is more important than making that money back right now.
4 Calculating profits before even entering the market
This is specific to new traders. The kind of thinking that says ‘if I enter such a trade and make such and such profits on the first one and this much on the second one…’ is very harmful. This is because ‘such and such’ will probably not happen.
The market is unpredictable and losses are inevitable. So don’t go in with high expectations to the point that you get disappointed and lose faith in your trading skills when you’re not able to reach that profit.
5 Relying completely on technical indicators
Letting technical indicators dictate your moves and trades is a bad idea because they should only serve as assisting factors. Ultimately your brain and strategy should tell you what to do next, using the information technical indicators provide. You’ve still got to think on your own.
6 Expecting to make money every single day
That is not a sustainable hope. You can aim for a weekly or monthly income overall, but hoping to make something every day will throw you into a downwards spiral. It does not happen for anyone this way. So, don’t keep such expectations from yourself.
7 Being over-cautious
Not letting your trade get ripe and not allowing the market to do its thing might mean very little loss, but it will also mean very little or no profit. If you put your stop loss really close, you are not giving it enough time to to make profits that you might have made off of the trade.
8 Not being cautious enough (FOMO trading)
FOMO stands for Fear Of Missing Out. This will prevent you from taking a good profit when the going is good for the fear of missing out on an even bigger profit– one that might never come. You have to remember that most trades will not go too high. Don’t stay in a trade for too long hoping to become rich off of that one position.
FOMO trading can also cause traders to jump into every other trade. You have to be very careful about the trades you pick and about the lot sizes as well.
Finding a balanced approach is very important, where you allow for some profit (and potentially some loss too) while also ensuring you’re not setting the ‘take profit’ bar too high.
The whole problem with FOMO is the thinking that this one is it and that you will not get a chance like this again. You will. It might want to go for a bigger lot size than you usually go for and can afford. Also, it might want you to take every other trade. You have to be wise when picking your positions. Even if you miss some, that’s fine.
Charlie Munger, Warren Buffet’s business partner said when talking about missing the opportunity to invest in Google and Amazon that, ‘We will keep missing them. Our secret is that we don’t miss them all.’ So it happens to everyone, even the biggest investors in the world. So it’s fine if it happened to you too. In fact it’s bound to happen at some point.
9 Relying on others’ knowledge and trade ideas
Sure you can use them, but make a strategy of your own- one that is informed by your own reading and research. Don’t just keep acting on what you hear from others.
It’s helpful to take good advice, but take it with a pinch of salt and develop enough understanding of the system to figure out what will work for you and what won’t. For this you need to do your own study and research.
10 Gambler’s fallacy
This is the idea that past events dictate the future ones. They do not. If you’re supposed to flip a coin 6 times and the first 3 times it lands on heads, it does not mean it will do the same the 4th time. The chances still are 50/50.
Every event is independent of the previous one. Treat them like that. A streak (losing or winning) will not definitely end soon. There will always be a 50/50 chance. So don’t base your moves on this idea of a balancing force.
From the above mentioned points the main takeaway should be that emotions have no place in trading and that balance is key.
The aim should always be sustainable trading and continuous profits. For this you need to keep your hopes and fears in check and instead employ information and logical thinking as your primary tools.