Trader’s main psychological traps and how to deal with them
It’s almost impossible to imagine trading without psychology. Today we will analyze traders’ main psychological traps.
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It seems to many that trading is all about charts, numbers, volumes and other market analysis tools. For the most part, this is true, but do not forget about an equally important factor called psychology. This may sound strange: what is common between huge capitals, market analysis, global trends and “some kind of psychology”? But make no mistake: every experienced trader will tell you that it is impossible to do without this banal thing in trading and market analysis.
“In trading, your most dangerous enemy is yourself.”
A well-known expression, the meaning of which for most remains incomprehensible. Fear of missing out on profits. Agony after another stop loss. Greed that leads to loss. Revenge and attempts to recoup after unsuccessful deals. And what unites all these factors? Psychology! It is the thing that comes into play when every pip has been calculated, and the hands are reaching out to place the coveted order.
In this article, we will discuss in more detail the main psychological vulnerabilities of the average trader. After all, by neglecting psychology, you deprive yourself of an understanding of how crowds and big players think, and what factors can take money right from under your nose.
FOMO (Fear Of Missing Out)
Many people know the abbreviation, which translates as “fear of missing something”. It is because of FOMO that we buy an asset at an inflated price or sell at a low price. One of the most frustrating experiences when trading is watching an asset you've been staring at make big moves without you. For some traders, this is even worse than a loss!
The key to fighting FOMO is to take full responsibility for sticking to your trading strategy that you have set for yourself. Stick to it, and don't let pullbacks, momentum, or any other factors change your strategy.
Even if there is a lot of talk about how much you could earn if you opened a position a little earlier or at a lower price, try to ignore them and restrain your desire to “show everyone what you can do”. Opinions are good when they are constructive, but there will be little sense in regretting failed deals.
Desire for revenge. Trying to recoup
The reaction of most traders after an unsuccessful trade: “How can I cover this loss and make it quick?!”. They grab the first asset they see, fail, and then find themselves in much worse situations. The best traders don't let trading losses affect their emotions.
When emotions reach their peak, your capital is in serious danger. Trading for revenge can cause even the most meticulous trader to increase his position size, stay in a drawdown too long, or use contrived arguments to identify trends and analyze the market.
Trading requires a cold, calculating state of mind. This is probably why algorithms are so good at this. You don't need to be a robot to trade successfully, but you do need the ability to recognize when your emotions are running high and take steps to avoid impulsive decisions.
Emotional connection to trading
We all have emotional experiences of certain events. However, when it comes to trading any of the markets, it is worth trying to put aside emotions and take a more disciplined approach.
Having a written plan of action, set of boundaries that you should not go beyond, is the best way to avoid the influence of emotions when trading. Abandoning subjective sympathies and preconceptions and dedicating yourself to analyzing dry indexes and specific factors are all fairly easy ways to maintain objectivity.
Greed
A very broad concept that each of us had to deal with. In the world of trading, success is universally measured by the amount of money in a trading account. Greed is the determining factor that damages your PNL (Profit and Loss). Here are some of the most common mistakes:
• Aggressive risk taking. In order to make more money and satisfy greed, a trader can accept risk conditions that exceed the available resources. Opening big positions and reckless money management are common problems associated with greed.
• Overtrading. The result is often impulsive trading, where the trader ignores pre-established rules in favor of chasing profits or covering losses. As a result, this style of trading leads to burn out.
• Unwillingness to determine profit and loss (“Take Profit” and “Stop Loss”). Profit and loss are key elements of money management that must be determined before making any trade. Greed is very restrictive in this regard, because profit targets are often unreasonable, and the realization of a loss leads to emotional fluctuations. The result is a manifestation of indecision, which sooner or later will lead you to major losses.
• Euphoria. If greed remains unmanaged, periods of continued success can lead to feelings of euphoria, as overconfidence can lead to aggressive risk taking.
Never let emotions cloud your mind when it comes to trading on the stock market. Impulsive decisions must be backed up by rich experience, otherwise such a practice can reduce your capital by a significant amount. Analyze yourself and your behavior. Don't trade when you feel like today is not your day. Study the psychology of people's behavior and then it will be easier for you to perceive everything that is happening around. Good luck!
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