Traders are human. All people might be susceptible to psychological misperceptions. Cognitive biases may affect traders as well. All persons can fall prey to psychological traps manufactured as a result of a person’s own non-existent awareness. Common psychological trading mistakes are a serious threat to trader performance. However, dealing with them is well within the realms of possibility.
Just as a mist prevents us from perceiving things as they actually are, so cognitive biases lead us to make skewed judgements regarding our environment. The problem lies within ourselves. Once we have identified our own shortcomings, we are very much in the zone, ready to give our optimum.
Common Psychological Trading Mistakes: FOMO (The Fear of Missing Out)
Shelving our own risk-reward ratio, novice traders are sometimes tempted to seek success outside our trading plan. FOMO, or the Fear of Missing Out, impacts greenhorn traders when they are lacking in confidence. These traders generally are afraid they will not be able to achieve their goals. They misperceive their trading plan as wholly inadequate. They are not sanguine about their ability to look at the future in the eye.
There are two sides to FOMO. These include: your trade has so much more potential that you simply can’t let go; you see impending losses which you wish to protect yourself against when the trade recedes.
FOMO leads the novice trader to make rash, hasty judgments. They might make a hash of the trade by entering it too early, and unprepared at that! In the event of your having missed such a trade, you (afflicted with FOMO), would be suffering from the anxiety of having missed out on a trade that would have been a piece of cake for you.
And those traders who are really afflicted with FOMO go all the way to stay in trading at the most inopportune points they are petrified they will be unable to maintain their gains. Or they could (in their erroneous view), be afraid of letting go of easy pickings. To the FOMO sufferer, the future is so uncertain he wants to make hay even when the sun has darkened over.
The risk-reward ratio position is severely jeopardized. But the FOMO-drunk trader knows not what’s in his own best interest.
Post-Trade FOMO
The trader misjudges when to enter the trade once a rally has started. Entering in the middle price range makes the novice more susceptible to drawdown. Considerable drawdown retracements and a plunging RRR (Return/Risk Ratio) will result from your having allowed a broad stop loss position. You, as the novice trader deluded by FOMO, have put your survival at risk.
What does a Forex Trading Expert Advice?
The novice ought to stick to his trading plan and be at peace with himself. He cannot extend the frontiers of his limits overnight. He has to commit himself to gradual, systematic growth. The trader should be self-aware. When FOMO strikes, he should recognise it as a cognitive bias and adjust his sights accordingly.
Revenge Trading
Revenge trading is the next common psychological trading mistake on our list.
Revenge trading takes place when the trader experiences a substantial loss. This trader is definitely a novice in that he has still not sorted what he’s about. He forgets his entry and exit strategies, shelves his trading plan.
He remembers not his evaluation of his own skills. He forgets he has remain aware that there are common psychological trading mistakes. He lets anxieties confuse him. He gives in to urges rather than take a decision.
Markets are not predictable. It never pays to have a long term angle regarding trade planning. Rather, the focus has to be on the ‘here and now. Given its intrinsically complex nature, trading involves having to deal with common psychological trading mistakes. An incomplete understanding of how markets work lends to cognitive biases. If the novice trader had an early insight into the nature of markets and trading, there would have been no trading mistakes. But a little knowledge is always a dangerous thing.
For that matter, the novice trader – or anyone who succumbs to revenge trading – is psychologically not strong/mature enough to correctly perceive their own emotions. Actually, the principal tenet of trading is emotional rigor. We don’t mean ‘unfeeling’. We mean the right reaction to any challenge. And it is here that the revenge trader fails.
It has happened with advanced traders, too. That does nothing for their credit. Instead of leaving trades once they have lost, they dare to throw the gauntlet to natural logic. They take faulty decisions when they are most in pain. The pain of significant loss is considerable. Therefore, it makes complete sense to quit trading once the loss is registered. You have to rest, lick your wounds, and heal. Thereafter, you regroup (your skills), and take on the unpredictable market again.
Treating the Malady: Measures Against the Tendency to Revenge Trading
If you think you could be susceptible to revenge trading at some point, we have the following recommendations for you:
· Step back;
· Assess yourself;
· Evaluate the market;
· Weigh your trading strategies;
· Know yourself and adjust accordingly.
Step Back:
To evaluate the situation post-loss, you ought to just step back and reflect. There’s always a way back. A small break won’t hurt. You might even consider revising your trading plan.
Assess Yourself:
The burden of the revenge trade has to be borne with clarity and mindful awareness. The trader must revisit his goals and purposes. He might have to let his trading plan undergo a comprehensive overhaul. The consequences of the train wreck that the common psychological trading mistake needs rectification.
And the trader must be able to firmly eschew revenge trader in future.
Assess Market:
There’s no call to be overly harsh with yourself. You telescope on the markets as well. How are they culpable? Is the volatility extraordinarily high? Are the trends indistinct?; What extraneous factors are impacting the markets at this ‘cataclysmic’ moment?
However, if you can determine that the markets were not especially quirky at the time of your revenge trade, you will have to jettison the notion of finding scapegoats. In this event, you are to blame.
On the bright side – you can go work on yourself within full focus.
Assess Your Trading Strategies:
The crisis that common psychological trading mistakes bring is to be taken as an opportunity. You can now compare your abilities vis a vis market conditions. There are enough parameters now that you could tweak your trading response to. Resultantly, you emerge stronger than ever.
Revenge trade (or any of the several common psychological trading mistakes, for that matter) are therefore to be understood as a learning opportunity and to be utilised as such.
Know Thyself, Adjust Accordingly:
Now you have the opportunity to undertake a thorough revamp of your trading strategies, your trading plan. You have worked on yourself.
The following is like a mindful awareness exercise (not misplaced, since we are discussing common psychological trading mistakes) –
· view dispassionately that the losing trade was not what you had expected;
· absorb the lessons of the trade and jettison the rest of it;
· do a mental rehearsal of what you would have done differently;
· Promise quietly that you will save your trade the next time around.
The Gambler’s Fallacy:
Past trades do not affect future ones, and traders should know this. Gambler’s fallacy makes people go all overboard betting.
Even the most commonplace assertions can be rightly categorised as falling under Gambler’s Fallacy. The assertion that bull markets cannot go down
for four consecutive years is an example.
Randomness does not Equal Reversion
Those deluded with Gambler’s Fallacy think flipping a coin responds to the reversion of randomness. Even in the case of the unprejudiced coin that is flipped 3 times, landing heads every instance, there’s no scope for prediction.
Upon the next flip, the coin may land heads or tails. The coin has no memory. It is just as likely to land tails up as heads. Claiming that there will be bull markets for 4 consecutive years is like trying to predict the coin’s flip.
Regression calculations for a year after year stock market returns prove that each performance is statistically independent of others.
Year after year market returns is random and independent of each other. Selective memory and confirmation bias lead us to make misjudgments regarding our future chances. However, trying to predict markets, or the outcome of flipping coins, is folly. We simply do not have full information, and these systems are not amenable to complete analysis. Traders must work best with what they have. Shortcuts are clearly to be avoided.
An Allied Psychological mistake: The Hot Hand
The Hot Hand Fallacy is often considered alongside Gambler’s Fallacy. Hot hand, a cognitive social bias, leads the trader to believe that successful past performance is the yardstick by which to measure probable success in future. A good thing does not end – so believe hot hand adherents. Future events are actually independent of the past. This simple truth escapes the hot handers.
If an event has occurred rather too frequently in the past, it is less likely to happen again in the future. Gambler’s fallacy complements the hot hand fallacy. If you delude yourself with both, you are putting your trading in jeopardy.
Common psychological trading mistakes are financial markets behavioral biases that adversely impact investment decisions.
What’s behind the hot hand fallacy exactly?
It was while studying the misperception of random sequences in basketball that three academics gave a new interpretation to streak shooting and hot hand.
Outcomes are independent of preceding performance. This was the result with regard to basketball that the academics reached. The 1985 study also showed that people tend to misjudge statistical information with regard to random events.
A coin toss best exemplifies the two common psychological trading mistakes. These biases can be understood by just flipping a coin. In ‘gambler’s fallacy, a trader assumes that a long head/tail sequence makes for a greater probability of getting ahead/tail. Going by the hot hand fallacy, the more frequent your coin flip has returned head/tail, the more likely the trend (head or tail) will continue apace in the future.
Hot hand as a Common Psychological Trading Mistake
Hot hand fallacy is often treated in conjunction with gambler’s fallacy.
When traders keep on buying the same assets that are experiencing profitability at the moment, we have the hot hand fallacy. There’s bias with regard to the fund manager who’s had a hot hand in the recent past. His clients desperately want to believe the fund manager’s winning streak will not run out. A good thing keeps on going – so say the hot handers.
However, this is as irrational as the behavior of those gamblers who redeem lottery tickets for more tickets. They are hoping the hot hand will keep winning.
The hot hand fallacy is just that – a fallacy. There’s no guarantee there will be a successful performance in the future if there has been a consistent success in the past.
The discounted future asset values wreck the illusion control these traders want to hang on to.
Cognitive biases & Common Psychological Trading Mistakes
Cognitive biases lie behind common psychological trading mistakes. You may also understand these as self-deception biases. Most of the time, we err to excess. Overconfidence bias shows how we tip our own self-evaluation completely in our own favor. Overestimation, over placement, over precision are the cognitive biases that cloud traders’ judgment.
Forex trading really gets them going! There’s no denying the exciting character of forex trading. When we are winning, we would like to keep winning – without end. However, all good things do come to an end, and this is true of forex winning streaks as well.
Forex trading is not a panacea for all ills. Paraphrasing Thomas Hardy, happiness is only an episode in a general drama of pain. Hardy’s take on life, albeit morbid, is not entirely without merit. Winning and losing come and go, like cloudy days and sunny ones. It’s all in the game. One must train oneself not to lose equilibrium. One must not be either overjoyed or saddened to a crushing point.
And forex trading is not the silver bullet that will destroy your inner demons. If you have psychological blockades, please get them sorted out. Only once you are emotionally fit can you have hopes of being the Zen FX Trader.
Common Psychological Trading Mistakes, and the Insight to face them
The rip van winkle test: You have a tendency to check asset prices every now and then, every day. You think the sky will fall on your head if you don’t. Just trust us on his – take the advance, and you will find nothing’s amiss.
Like the protagonist of that old tale, go to sleep without setting the alarm on the clock. Rip van winkle woke up after ages and, upon awakening, found nothing awry in his environs. Take a vacation from your price checks. Give that costly obsession a really long rest. When you awaken van winkle fashion, you will wake up to the same trend features. As far as prices go, you will find that you have not lost your tab at all. The prices are, in fact, much the same as they were ages ago.
Reason & Money Management
Money management is the panacea for your financial ills. You will feel protected, even on cloudy days.
Trading (more so momentum trading) tends to be streaky. Trading is, by its nature, fickle. You cannot pin down its behaviour. Long term trading plans are an impossibility. That is why you have to focus on the immediate future, and nought else. Damage mitigation when it’s cloudy, and reining in your ego when the sun’s shining – money management keeps you reasonable.
There Are All Kinds of Market Conditions
There are bull markets, and there are bear markets. It is easy to feel really buoyed up by an exuberant bull market. However, you ain’t seen nothing if you haven’t seen a bear market. Being in the know of things is not all that essential. You are more than capable of riding out your storms when they come.
Know that there are all sorts of conditions, and all of them are quite within your tolerance limits. There’s no need to make a habit of losing your level-headedness.
Are You Confident About Your Methodology?
When you are sure your methodology will keep stopping your losses until you get to that super trade, you can rest easy. There will be no big losses.
Even if you have not been on the block for that long – you get the message. Good times and bad, you have to keep your distance from emotional reactions.
Are You Keeping Strictly To Your Methodology?
Get rid of all that reversal trades and breakouts that do not align with your methodology. The way you trade has to be compatible with your aptitude and traits. Don’t bite off more than you can chew.
Sitting on your hands when it’s cloudy is not a loser’s strategy. You would be a real loser if you deviated from your own trading methodology.
You Need Not Be Wiser Than the Market
When you are entering a trade too early, ignoring your platform triggers, you are stepping on a banana peel. When you are exiting a trade at the slightest sign of trouble, then too, you are being unfaithful to your trading methodology.
Be good at your methods of trade, and the market will be good for you.
Love Your Trading Plan!
Appreciate the fact that there are limits within which you can prosper. The trading plan will allow you horizons. When you seek another frontier, you might well fall into intolerable losses. Why must you tempt fate?
Is Your Focus Correct?
Do not go looking only for ideal trades. Instead of getting the ideal patient, the shrink might have to be satisfied with a real train wreck. The professional does not complain. You must not look away from mediocre trades.
Ideal trades are only once in a while. Hone your trading skills on average trades. It will do you a power of good.
Do Not Let Trading Be the Be All And End All
There’s much more to life than just trading. Trading is just one of the number of things you do. Do not let it make you go nuts.
And in case you already are nuts – know that trading does not complete you if you have emotional cockades. Trading is a science. If you think trading will lead you out of life-impacting crises – think again.
Mindful awareness & common psychological trading mistakes
You, as a trader, pride yourself on your professional acumen. However, once you have been to the brink, fortunate enough not to have plummeted into an abyss of colossal failure, it’s awareness time. You must step back, take a break, and regroup your faculties.
Personal exploration is something whose onus lies on you. if you are up to it, sort yourself out. Read up on mindful awareness. The latter is a system of mediation rules that have been proved to impact positively upon frayed nerves. There are DIY guides. Considering that you are not an absolute train wreck, you can look after your own set of Mindful Awareness Practices. UCLA has an excellent Centre devoted to just these.
If you choose professional help, even then, the basics are simple to grasp. Mindfully aware traders can take joy in their faculties, nurture self-esteem, distance themselves from anxiety, and experience an overall superior quality of life.
In short, mindful awareness can help you calm frayed nerves post-apocalypse. You need never face the abyss’s brink again. You will learn to be happy with yourself. Building yourself up when you are calm will make your career goal so much easier to achieve.
Conclusion:
Common psychological trading mistakes can particularly affect those who are either relatively inexperienced or have their priorities down less than pat. FOMO, Revenge Trading, Gambler’s Fallacy (and Hot Hand Fallacy) are foes easy enough to lick when you know your own strengths. Mindful awareness practices are not only for the mentally sick. Poor evaluation of Forex trading problems is also a set of cognitive biases that demands a focused treatment. Treat yourself, know yourself. You will be back in the game – stronger than ever before. You can start your trading journey with one of the reputed and trusted brokers InvestBy which offers an advanced level trading platform and trading tools. Educational and research material offered by the broker can help you to achieve success in your trading and avoid such mistakes.
