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The psychology behind some of the most common trading mistakes

Updated: Aug 16, 2019

Many traders don’t realise this early on – market conditions change over time.

As a currency trader, you can spend weeks analysing a specific market that suits your strategy at the time, but this is likely to change, since the market is constantly evolving, and sentiment regularly shifts to both extremes (as you will have witnessed on the spreadsheet)...

A perfect example of this change in market conditions can be seen when comparing EURUSD in 2017 against the first half of 2019.

In 2017, EURUSD was in a strong uptrend (if you recall) for the majority of the year. Backtesting trend trading strategies would naturally yield attractive results and any reasonable trader would look to implement such a strategy.

Perhaps even unconsciously, through force of habit, from watching the same instrument on a daily basis: a bias becomes easy to "fix in your mind" that it is in a "bullish" or "bearish" trend, and you simply become accustomed to that particular direction. After all, it's been reliable so far, right?

A very different picture can be seen today as EURUSD trades sideways and slightly south for the first six months of 2019. The 200 Daily Moving Average helps make this point as it acts as a strong guide for future price resistance and support.

I do encourage you to use the 200 DMA on your charts so you can quickly establish the trend / direction. You'd know by looking at the 200 DMA on GBPJPY daily, you'd not buy dips, rather you'd sell the rips, for example.

“FAIL: First Attempt in Learning” Anonymous

1) You should always try to be in control of your emotions.

If you are tired, you could be prone for irrationality. If you are irrational you may make mistakes. If you are angry or bitter at the market, you may revenge trade. If you are bored, you may over-trade. If you are scared, you will take profits too early. If you are overleveraged, you will become stressed.

And so in a nutshell, all negative emotions should be avoided.

2) Don’t Let Risk Change Your Behaviour

The biggest psychological obstacle for traders is the perception of losses (and the concept of losing).

Top traders apply sound risk management first and foremost. You can win two-thirds of all your trades and still land up blowing up your trading account because of that ONE bad trade you made, where you constantly moved the stop loss etc, and allowed emotions to overcome sound judgement.

A natural consequence of this is you may allow losing positions to run, while taking profit as soon as a position turns positive. The losses outweigh the winners and this should never happen. You have to remember its for the long haul. You always want the winners to outweigh the losses...

One way I found to overcome negative emotions as follows:

a) Ensure you have a strong bias. The sentiment and monthly pivots really help. You need confidence in entering the trade and these will help you, sentimentally and technically.

b) Use a trailing stop or manually move your existing stop when the market moves in your favour. This way, you can relax knowing that you are in profit, whatever the outcome.

c) Before placing a trade, know what level of risk you are prepared to take on, and that your lot size is appropriate for the size of your account. If you are unsure what lot size to use, let me know. Do not over-leverage. Trust me, it's not fun.

3) Bring a Positive Mindset to the Charts Every Day

Since you will inevitably be taking small losses over the month, it’s important to deny those losses from altering your frame of mind.

You will often experience the disappointment of being stopped out and this can be very discouraging. As a result of this you may lose confidence and doubt your system or question the biases which encouraged you to enter in the first place.

The key to keeping a positive mindset in trading is to look at losses in the same way that a business owner looks at expenses; simply as a cost of doing business.

As a consultant in a Software company in London, I had my limited company, where expenses were "business as usual", perfectly normal activity. For example: I had to buy a train ticket, in order to arrive at my destination. But without the train, I wouldn't get paid, you see. This legitimate expense was simply part of the process of making money in the long term.

As long as your expenses do not outweigh your income, you will always do well and profit long term. Like, say, if my train ticket was more than my daily contract rate, it would not be profitable, and my business would fold.

This is why I am keen for you to trade with proper risk management, and know where your entry and exits are, so you always strive for gains, and hold onto them much more than you are prepared to risk.

Because once you’ve learned to lose properly, and after you’ve learned to keep those losses in scope of the bigger picture, that small losses are perfectly "okay" – you’ve addressed biggest aspects of trading psychology.

3) Strike the delicate balance between fear and greed

These two drives can have a large bearing in the way we live our lives; and we see it all the time on our spreadsheet.

When trading, both fear and greed can be massively detrimental, as they can cloud your judgment and lead to bad decisions.

Most human beings will be greedy when they have a losing position; willing to hold on if only price can come back to their entry level. And when in a winning position, most human beings will begin to be fearful.

You should look to reverse those drives and to be greedy when you've been proven right. After all, if we know 80% of retail traders consistently lose money, so for us, by doing the opposite, we have to be onto a winner... It's just laws of probability.

If fearful, you can exit too quickly to help alleviate the concern that your initial risk is still exposed. It's as though as humans, we do the complete opposite of what we should do, to be successful in trading; and this is why the sentiment analysis is so powerful.

4) Don’t let confidence get the best of you

After putting together a string of successes, it’s human nature to build up confidence around your dealings and this can be a good thing.

But once a trader has gone into the territory of being ‘over-confident’, risky habits may sneak into their approach, none more damaging than the willingness to bend their own trading rules simply because they feel it will be successful.

Always stay humble, or you can be easily humbled.

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