In this blog post I will go over 7 common mistakes in trading psychology. I know that’s a subject many traders are not so interested in, however if you master it you will have a huge edge, so let’s go!
Trading Psychology – The hardest thing to learn
If you’ve ever had real money in the line behind a trading decision you made you know how challenging it can be.
Our minds are simply not adapted for trading since it involves so many counter intuitive decisions that our psychology can simply make a short circuit, forcing us to make bad decisions and trade to lose.
Let’s take a look at classic mistakes we all commit when learning to trade or even later, when we think we are ahead of the game, but the market reminds us to be humble.
We assume we are right:
First thing to remember when trading is: The market is always right. That doesn’t mean we can’t be right. However we must NEVER “fight” the market.
If things are not going our way simply call the trade off and let it become a loser within your parameters, you’ll have another trade, another day another chance to make money.
Because our last trade (or last string of trades) was a winner (or loser) the next one will be a winner (or loser) too.
That’s a simple mind trap, since we learn from experience; our brain will try to find patterns in everything we do and everything happening around. That’s one of our most vital skills: our brain knows that since the sun set yesterday and the night came along, that will happen today as well. That’s one of our basic survival skills but not so useful in trading.
I know of many trades that could have been winners but I didn’t take them because I was so “stressed” from previous failures. And so many trades that I shouldn’t have taken but I did because I was so “hyped” from having a string of winning trades. So next time you trade make a big effort to forget (I know it’s impossible but try your best) your last trade and approach every single trade with the cleanest mind possible.
Trading is exciting:
When we are looking for excitement in our trading we are surely aiming for failure.
If you came into this business for the rush of it let me tell you you’ll most likely fail. Our emotions dictate exactly the opposite of what we should do when trading so make your best to calm and trade professionally, that means with the least amount of emotion you can.
When I was learning to trade with my mentor I was so emotionally involved with my trades that I tended to make rash decisions. My mentor forced me to enter the trades and shut down my computer and only see the result of my trades. At the beginning it was super hard, but eventually I learned to simply act according to my strategy and then forget the trade.
The harder you work the better results you have (part 1):
that is something our brain has wired to the core, since we were children we’ve learned to work to get results. So whenever we expect to achieve great results from something we are ready to put all our hard work into it.
But, as I told you before, trading is counter-intuitive. There’s actually a term in trading called “babysitting the trade” it means to be glued on your screen watching every pip the market moves.
Somehow our brain leads us to think that the more “attention” we put on the trade the better the result will be.
Well, let me tell you that is wrong. Let’s say for example that we enter a trade after we saw a big rejection pattern on an important support level. We already identified the target and the stop loss. Well the trade is in, our money is in the markets, just forget about it and go have a cup of coffee.
The more you “stare” at your trades the worst you’ll perform.
Since we tend to think that we can somehow influence the trade and start to make decisions such as: “I should go out now, the market is changing it’s direction” just to see it go against us for a few pips after we exit and then moving big in our original direction. So just stick to your strategy and when you find a setup let it simply unfold.
The harder you work the better results you have (part 2):
This is another classic mistake in trading psychology. We tend to think that more trading means more profits, but that normally means more loses and overall less money in your trading account.
Not only because we force our brains to find trades where there is nothing hence we tend to brake our rules and fall into the common trap known as overtrading; but because we will be paying a high price in commissions and spreads.
I remember when I was trying to scalp the markets, the first few weeks my results were not actually so bad, I was supposed to be out with a small loss, or at even a break even, according to my trading journal. However my account had a huge hole of -$1,200 that I couldn’t figure out where it came from.
After calling my broker on the phone and going through my statements I found that I’ve spent over $1,000 in commissions in less than two weeks! Yes every trade was costing $5 to open and then another $5 to close, so $10 for every trade I did. That was only 50 trades! It sounds like a lot but I was opening and closing around 5 – 10 trades every day, so commissions added up very quickly. So be very mindful of your trading costs and if you scalp or day trade look for the right broker for you.
Trading is gratifying:
Since we make money, or at least try to make money trading. We tend to think it’s gratifying.
That’s another counterintuitive situation for our brains. Let’s say for example that we have a lot of trouble at home, maybe you have a complicated family, well you go to your job as a graphic designer, or whatever job you have, and you can forget about your problems at home at least partially, you know you will be making money from your job and that is gratifying, you simply have an entire 8 hours where your money making activity will become your focus.
Well not so in trading. To trade right you need to have your personal stuff in order. If you trade with emotional or financial stress you will most likely make poor decisions.
Why? Because we will be making so many more mistakes since so much depends on our trading.
That’s why I always recommend people to start trading demo for a few months and then opens a small account and keep adding small amounts over time. Not only because that way they’ll risk much less money, but also because they will remove their expectations and hopes from trading, since financial gratification will be much deferred. And thus will learn to trade more like a game or a sport.
After you actually see how you can make virtual money, then you can expect to have confidence and risk your hard earned dollars.
Trading is complicated:
That’s another classic trading psychology trap. Making money is normally always a complicated thing.
We must perform a job that will take our skills and abilities or even our physical strength. We will have to study for many years, wake up early, and tolerate a nasty boss. In general it won’t be easy.
Well, let me tell you something: trading is simple. You just enter the market and make money. That’s it; it doesn’t matter if you enter with a position of 1,000 or 1,000,000.
The market will behave exactly the same. You will make one thousand times more money if you enter with one million than with one thousand, however the effort will be exactly the same: almost none (I mean, just to click a few buttons and enter the trade). So our minds will tend to always overcomplicate things.
If a trading strategy is simple we will think, “oh, that won’t work, that’s too simple”. If we see a trading setup in front of us that fits our criteria perfectly our mind will think: “Something should be wrong, I am not seeing right”. Remember, trading is not a game of US but a game of whatever the market is doing.
My conclusion on Trading Psychology
My conclusion is to try not to focus so much in ourselves when trading.
We try to make everything about ourselves, and that’s normal and something that can even be positive in most activities.
But trading is not about ourselves but about us trying to make some profit from a massive force that doesn’t care or is affected by us in ANY way. I will say it’s much more like surfing. The wave couldn’t care less if you drown or make the best surfing, it will go anyway disregard of you. So focus more on the market and less in yourself.
Next time you enter or are managing a trade stop for a second and think if you are making any of this common trading psychology mistakes.
The first step in dominating your mind is to actually be able to identify your behaviors.
As always I’d love to hear your stories and questions on trading psychology or any other trading related matter you can comment here or send me an email to firstname.lastname@example.org