Being profitable in trading is directly linked with developing the right trading mindset and the right trading mindset can be developed by mastering your mind and controlling your thoughts. It means that trading based on logics rather than emotions brings a lot of profitability in this business. In this article we shall cover three psychological mistakes that leads trader to losing their hard-earned money.
1. FOMO Trading
FOMO stands for fear of missing out. Such traders think that they may miss an opportunity of earning a profit if they could not ride this trade or trend. These kinds of trades are very optimistic about every trade and they think this could be the trade and can make them millionaire or that can start their journey toward profitable trading or this trade may cover all their previous losses. Such thoughts are based only on emotions not logic. They think that if they miss this trade, it may take a lot of time to find such an opportunity again. They do not realize that trading opportunities come and go on a daily basis. The worst thing in this mindset is that they even realize that they are making a psychological mistake. When these traders see an opportunity, they also increase their position size on a particular trade because by thinking that it is going to make a fortune for them. They are over optimistic about the profitability of that trade and they think that there is no way that they can lose money in this trade. But the time when their thinking proves just an illusion, they already invested a lot of capital in that trade and that leads to a not only losing a trade but also losing a lot of capital as well which is impossible to come back.
If you are facing such an issue of FOMO trading then take a wisdom from Charlie Munger who was trading partner of Warren Buffett. Once Warren Buffett asked the Charlie Munger that how they missed the trading opportunities of Google and Amazon where they can make a lot of money on that Charlie Munger said that yes, we missed that and missed a many profitable trading opportunities but the good thing is that we are not going to miss them all. So, think, if the most skillful and exert traders are not worry about missing the trading opportunities that why you are worried about. Missing profitable trades is just a part of the game and it happens very often. To overcome this problem, you are supposed to stay away from all kind of trading chatrooms and social media where other traders are sharing their success stories of how they made the millions in trading a particular opportunity. Such stories of fortune building will bring a state of inferiority complex in you and you will start making wrong decisions. Trade alone for a while and if trading alone does not bring any profitable trading opportunities, then it is better to educate yourself more about the trading strategies and come back as a skillful trader. You must have clear idea of the trading strategies, when to enter or exit the trade and profit targets and stop loss strategies. So, your trading plan should be based on your trading strategies rather than rumors, trading tips or trade ideas from other investors.
2. Revenge Trading
These are the egoist kind of traders. They lose a single or two trades and then trying to get back their capital instantaneously. Such traders can lose their capital within few days after taking a loss. As a trader, keep in mind that there is no space for ego, anger or emotions in trading. When these traders are in a state of revenge, they lose their control and logics of position sizing, profit target or stop loss or even trading strategies. They trade blindly as their prime focus is to take the revenge from the market of their losing capital. Just keep in mind, that market do not know, who you are and don’t care about your emotions. If you continue such behavior, if may get you benefit in a couple of trades but in the long run it is going to hurt your account.
Before we go toward the solution of this issue, let’s identify why this issue even occur at the first place. If losses are hurting your emotions and upsetting you then it means you are trading large position size that are making a huge difference in your trading capital after a couple of trades. So, if you are facing this kind of psychological disorder then first thing to do is to reduce your position size so that you can make your decisions on the basis of defined strategy and logic. With every trading strategy, you lose some and you win some and don’t get the loses control you. The perfect traders are the ones who realize at the very early stage of their career that loses are a part of the game and you cannot get rid of them. You are supposed to manage them. After controlling your position size, control your mindset and expectation about every trade. You have to make sure that you are focusing on the long-term goals rather than on a single trade that is not going to define your future in trading. The aim is to be positive on a monthly or yearly basis and you will find a lot of losing days in a month and a year. Do not expect to earn profit on every single day. Be realistic and set your targets accordingly.
3. Gamblers Fallacy
This is not a straight forward related to psychology but is in close relation. This is some kind of misunderstanding of probability that may lead you to make poor trading decisions. As the name depicts it is related to gamblers and we don’t want to trade like a gamble. Let’s understand gamblers fallacy with the help of an example. Let suppose you flip a coin, then the probability of having a head or a tail is 50 percent for each. 50 percent chances of heads and 50 percent chances of tails. If you toss the coin for ten time then there are chances of 5 heads and 5 tails. Let’s suppose you flipped it 5 times and every time you get the head. If you flip it for the sixth time then what will be the chances to have a head or a tail. If you are thinking of tail then you are probably be a victim of gambler fallacy because even hitting five heads in a row, there is still a probability of fifty fifty in the sixth time. The gamblers’ fallacy can also be seen in many other areas of life. Like in casino, if few gamblers got lucky and are winning in a certain position then they blindly start making bets on the same track.
So, let’s apply gamblers’ fallacy in trading and find its solution. If you win five traders in a row does not mean that you will lose or win the sixth trade. The chances are still fifty percent of winning and fifty percent of losing. Winning too many trades in a row does not mean that winning streak is going to end and losing too many trades in a row does not mean that the losing streak is going to end soon. Just plan each and every trade irrespective of the results of the previous trades. Just focus on your pre-defined trading setups and religiously follow these rules. Just show your disciple even if you are winning or losing in a row. As Warren Buffett said that in trading, we are not supposed to be smarter than the rest but we are supposed to be more disciplined than the rest. Weak emotions are your worst enemy in the trading world so make sure that your worst enemy does not line inside you and cannot control your trading decisions.