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We have an interesting question here from a new subscriber saying that they are having a really tough time with their psychology. It’s a follow up to a question we did yesterday as well about recency bias. And they’re saying that the recent market moves have been very frustrating, and they’re losing money due to the psychology not being in the right place, and the asking, what are the common psychological issues that traders deal with and how they can beat them?
Thanks a lot for this question.
I think trading psychology is by far one of the most important aspects of your trading. You can have all the analytical and technical and fundamental skills in the world, and you can still lose money if your psychology isn’t in tune. So for me, there’s really three big issues that traders usually struggle with.
They are FOMO or fear of missing out, you also have recency bias that we discussed yesterday. And then there’s also trading without a process or confidence. The first one, FOMO, is something I think even the very best of traders struggle with. You know exactly what this is, you know, you see that very big move up or that tanking move lower. You see all the dollar signs running past you.
You know as the second stick by and the pips stick by suddenly you just jump in, because you don’t wanna miss out on a big move. And what happens when you jump in, it’s like a sick joke, right? The moment you jump in trading it to the downside, the market starts to take a breather, and it moves against you and moves against you some more and and moves against you so more and eventually you just liquidate the position, because you’re frustrated with the loss. And the cherry on top is the moment when you liquidate the position. It eventually moves in the right direction.
So, you jump in again because you don’t wanna again miss out. You don’t have that fear of missing out on the, eventually moving in your direction. And it starts to go down a little bit in your direction and you breathe that sigh of relief saying, “Okay, finally.” You know, it’s going in my direction only to see it move out again, and you end up taking another loss and the battle just rages on and on and on.
This is obviously only a one example of how FOMO can affect your trading. But it does play out with many different scenarios all, you know coming down to the same thing. The best way to sort out this type of challenges just by making a deliberate decision not to get sucked into any trades that you don’t understand.
If you are late, rather be late and miss out on that late entry as opposed to be sorry, by taking a trade that you’re not sure of and then ending up having a loser. As I said, it’s something every trader struggles with and will only get better if you make a conscious effort to root it out in your thinking, you know, so checklist for entries is something that can help you with and just having that deliberate pattern of not jumping in unless there’s a clear tradable catalyst for the market to be moving. The second common issue of course, is a lack of confidence or process.
Now, trading without knowing why you are trading is the biggest cause of stress for traders. What happens when you take a low conviction trade, a bad quality trade is that you basically just exchange confidence for hope, right? And hope isn’t a risk management process. So, you can hope that it will go up and hope that it will go down. But you still need to have confidence that it will go up and go down. And the only way that you get that is by making sure that you’re always trading in line with clear catalysts, clear sentiment shifts. This will also help you with your timing.
So, if you are right with the overall trade direction, you can get away with subpar entries, and still make a profit if you’re trading in the right direction, right? But you can only have that confidence in your trade if you know why the market is moving and why it should continue to go up or down.
And my honest opinion the only way out of this problem and it’s by making sure that you’re always understand why you are trading something. Always have a reason for why you think the market will be trading this pay up or down and by that your answer can’t be that, you know, you think it’s gonna go down because it’s gone up a lot, right? That isn’t a valid reason.
And of course, when you reach key technical areas of support and resistance, we can expect reaction from those levels profit taking from those levels, but you shouldn’t just buy or sell blindly, you know, just because the market is moved a lot, right?
Always have the fundamentals backing your trade direction. And the third psychological issue is recency bias, which we did discuss in more detail yesterday. This is when you fixate on the most recent things that has happened in your trading account, and you blow them out of proportion.
So, just because you’ve had five trades in a row, you know, let’s say winning trades in a row. It doesn’t mean that that fifth winner, or that fifth trade is gonna be a winner as well. But because you have that euphoria from the five most recent winners, you have that recency bias that plays with your psychology, and you end up taking bad trades because you think, you know, this is gonna be another winner.
It’s gonna be that number six trade, nothing can go wrong, you know, you’re just Iron Man trading away, and then suddenly boom, you have that losing trade and you get snapped back to reality. Vice versa is also true. Imagine you’ve had five losing trades in a row suddenly, that recency bias can start to affect your psychology. And you start to second guess a great trading opportunity that is staring you right in the face, but you can’t pull the trigger, because you’re afraid of taking that sixth loss in a row, for example. And the best way to get over something like recency bias is just by gaining more experience in trading, right?
A trader that has 1000 trades under his belt will act very differently towards a losing or winning streak compared to a trader that has only 10 or 20 or 50 trades under his belt. So, it really comes down to experience with something like recency bias.
So, I hope that helps with your question about the top psychological issues and some ways that you can overcome them. Any other questions on these please just let us know.