Education

Trading psychology: Avoiding common traps in your trading

How to avoid mental pitfalls

Trading is a high-performance
activity
and, like all high-performance pursuits, the mental element of
how you approach your trading is extremely important. Ironically, it is also
easy to overlook with many novice traders seeing it as an irrelevant part of
their trading.

However, trading psychology mustn’t be ignored
since our state of mind affects how we trade. This article will
consider five of the most common trading challenges that people face and offer
some solutions for addressing them.
ForexLive

Fear of missing out

This trap is when we see a currency move that has already taken
place and we feel that we just have to be part of it. It may have been a
central bank who changed their forward guidance and the market is pricing in a
fundamental shift for their currency. The price has moved 300 points and,
impulsively, we might simply enter a position in order to avoid missing out.

We then have to watch as price endures a 150 point draw down and
we have capital unnecessarily tied into a position that is in the red. A couple
of days later we may be angry that we were not patient enough to wait for a
pullback and get a far better price.

Becoming more aggressive after losing trades

You have just lost your third trade in a row. You are furious.
Your instant reaction is revenge. Of course, you may not see it like
that, but that is what you want. Your heartbeat has increased. You feel
angry. An aggressive response leads to a hastily planned trade, entered quickly
and spontaneously, which in turn may lead to further unnecessary losses.

Moving your stop loss

You have had a good run recently and made steady profits. Then
you enter a trade and it starts to approach your stop loss. You don’t want to
take the dent to your trading record, so you move your stop loss out further
than you planned.

Price moves again and does not reverse, so you move your stop
loss again; surely price will reverse soon. All your profit from your good run
has now been erased and you are desperate for a reversal. It never comes, and
you take a large, and unnecessary, hit to your account.

Failure to take a trade because you lost the last three trades

You have lost the last three trades and you are feeling low.
A good set up comes along, the technicals and the fundamentals are perfect and
this is exactly the sort of trade for you to take. However, you let it pass.
You then see the trade soar to make hundreds of points. You couldn’t pull the
trigger because you were still feeling low after a string of losses.

Jumping in to trades on market moves

You are at the charts and the EUR/USD chart suddenly moves 70
points for no reason. There is nothing on the news feeds to explain the
move. However, you jump in to the trade and as soon as you do price
reverses all the way back to the price it was at before the unexplained move.

The only difference is that you either have a losing trader or
are sat in 50+ points of drawdown. When you look at the positon you know that
you entered for no other reason than you saw the market move. You now
have a 50+ points mistake to erase before you start making profits again.
Impulsive, unplanned and completely unnecessary.

It can be easy to feel that you are the only one making
these mistakes and that maybe you are just not cut out for trading. However,
these traps are common for all traders and they all come from
having the wrong mindset. Here are three things you can do to help yourself
develop a correct mindset.

Don’t over leverage.

Not over leveraging allows a trader to think calmly and
logically. One of the major impacts of using leverage is that it is very hard
to think unemotionally when you are risking large percentages of your
account.

A certain aspect of successful trading requires a detachment
from a trade and not over managing it. If you are using high levels of leverage,
then you will find it much harder to keep an emotional detachment to your
trades. You are far more likely to intervene and mismanage a trade.

Get a mentor

Trading for many people is a lonely activity. Yes, there are
internet forums, but sometimes they are dominated by over bearing personalities
who are unhelpful. It can be hard to assess who you are speaking to on a forum
and whether their advice is good or not.

By getting a mentor, with a bona-fide track record, you will
know that their advice is worth listening to. You can also talk through your
trades with them and you will find that they have solutions for some of the
emotions that you have been experiencing.

Keep a journal

By keeping a journal, you can review your
trades. Why did you enter that trade? Would you do that again? If not, why not?
Use your mistakes to work for you and not against you. Take a break on
the weekend, grab a coffee and review last week’s trades. Let them be points of
learning as you review and adjust your mindset.

By doing these three things above, over time, your mistakes will
become less frequent. Finally, don’t be overly hard on yourself for your
trading losses due to your emotions since they are a normal part of the
learning curve for a trader.

It would be more unusual for you to not experience them
than to have an innate and complete mental mastery over your trading. Trading
is a high-performance activity and a business, so it should be approached as
such.

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