Trading in Forex and Stock markets is not only about the knowledge and understanding of the
fundamentals or
technicals. Trading is an art in itself. Even with a great knowledge and understanding of the market, you may find yourself continuously losing in your trades. You may know that the market will go up and you buy. Instead of going up the market starts moving down your stop-loss order closes your trade. The next minute you see that the market starts moving up, the way you had analyzed. You end up with a loss in the previous trade and now you are worried to buy again though still you have the feeling that it will continue to move up. It keeps on moving up and now we are just frustrated about our not taking an action of entering the market and also the unnecessary loss (because we put the stop-loss too close) in the previous trade. We just buy a bigger position out to make up. This time we put the stop-loss order too far. The market had already moved up quite a bit and as soon as we bought it does a free fall. Our stop-loss was too far and Oooops!!!
The emotional feelings, fear, greed and many times the addiction to trade can just kill what we have in terms of market knowledge. Psychological factors and sentiments greatly affect the performance and hence the results because of the dynamics of the market. When we talk about psychology, it’s about both, the mass psychology of the traders around the globe and our individual psychology.
Mass Psychology:
We do not have any control over the mass psychology but an awareness and understanding of it can help in what decisions we take at what times and situations. One example of mass psychology in the normal times is given in another article on the page by the name “Number Psychology”. Other examples can be seen in panic situations. The mass panic can fail all our analysis – weather fundamental or technical. In this article we will be talking about individual psychology.
Individual Psychology:
Let’s start with the most common mistakes which can either wipe our profits or prevent us from going into profits ever. We all can make one of these common mistakes in our trading career once or even more than once. The killer of a trading career is to make one or more of these mistakes as a pattern. To kill our pattern, we need to understand our pattern and this can only be done with the thinking and analysis with completely open mind as knowing ourselves, many times, prove to be more difficult than understanding others . We need to understand ourselves first to understand our actions and reactions and then to control the undesirable actions and reactions.
So lets’ see what are the killers:
1) Always entering the market against the Trend.
2) Entering the market in the direction of the trend when its too late.
3) While losing, increasing the positions in the same direction.
4) Trading addiction and trading by feelings.
5) Stop-loss orders too close or too far.
6) Take-profit orders too close or too far.
7) Learning from the past mistakes and then making a bigger mistake.
8) Loving our trades and bias for the figures.
9) Trading too big for your account size.
10) Varying the position size of your trades.
11) Not looking at the both at the long-term and short-term picture of the market.
12) Not using the stop-loss order- THE ULTIMATE KILLER (you can do all mistakes and still survive but you do this and you have invited the death of your account).
1) Always entering the market against Trend:
We enter the market thinking that it has already peaked in the trend and will reverse now. The trend continues. Our position meet with the stop-loss order and we make a loss. Some times it could be that just because we are too optimistic and biased about our feelings about the market direction but if it happens as a pattern then it shows that in our conscious or subconscious mind we have a rebellious nature. And if we look into it then rebellious nature goes hand in hand with optimism. We need to be optimist to be able to rebel. In simple words a person can be rebellious but if she/he is rebellious plus over optimist then only she/he will take actions against the controlling powers or common thinking of the crowd or society.
Most of the time it’s because of our experiences in past which made us to rebel time and again. Then it becomes a personality trait. It just becomes a habit where we tend to do it without thinking about the logics. Lets see if we fall into such category and then analyze how many times we lost in a trade because we entered the market against the trend without much analysis but just because of our feelings. Every trend reverses, its always a cycle, but what is important is trying to figure out the level where it may reverse and not just going ahead with our individual feelings.
2) Entering the market in the direction of the trend when its too late:
Some of us take risks easily while some are risk averse. The extreme to any side goes against good trading decisions. If we are a risk averse person then first of all this is not the place where we should be. Forex trading is not our game then. But still if we somehow landed with the trading business then with our risk aversion nature, we would tend to see 100% confirmation of the market trends. The fact is that in dynamic trading like Forex market there is nothing which can be termed as 100% surety. When we enter the market (buy or sell), there is always a risk. Better to take that risk at optimum level than to wait and wait to be sure because if we wait too long when a trend is going on, we may end up entering the market when it is on the verge of reversal.
3) While losing, increasing the positions in the same direction:
This pattern takes place with those of us who are weak in facing any kinds of loss, are gamblers in nature and also have high egos.
We buy a position. Instead of going up as we had expected, the market starts going down. We immediately buy more. It goes further down and we still buy more. Now either we are thrown out of the market by a margin call or by the time either we decide to come out the losses are already too big.
Why this pattern takes place? We take a decision and we are too egoistic to accept that we were wrong. As soon as the market starts telling us that the decision could have been wrong, we just panic. This panic is because we are weak in facing a loss as well as weak in accepting that we were wrong. On one hand is the ego and on the other hand the fear to lose. We buy more expecting that a little reversal would at least balance the loss we might make on our first position.
In certain situations adding to your losing positions may get you nice profits. It generally can happen when market has gone too far in one direction and a reversal may be around the corner. For example during an uptrend the market reaches too high and we decide to short-sell. The market goes against us and moves further up. We short-sell more and so on….. Because the market had peaked up, there were good chances that it would reverse and we would end up with nice profit. But if such actions take place as pattern in different kinds of market situations (not only when its seemingly at the peak or the bottom), it would just wipe out our accounts, certainly, on one fine day.
A trader needs to be emotionless. No absolute egos, no absolute love and no absolute fear. Just a control over all emotions to keep them balanced so that they work for us and not against us.
4) Trading addiction and trading by feelings:
By nature some people are addiction prone and some have better abilities to avoid addictions in life. Do you have more than one addiction in your life?
Do you always feels the need for a company and can’t feel like being alone even for short durations? Do you always feel the need to communicate and start feeling uncomfortable without communication even during short periods of time?
Well, if the answers are yes to one or all of the above questions then you may make this mistake (not being able to detach yourself from the market) as a behavior pattern. You may not be able to be away from the market at all. What is meant by being away is not having a position. The trading platform running on your computer is not a video game. Working on your platform is serious business. It’s your hard earned money which you are putting on.
There are times when we are not at all sure about the market behavior. Its just going side ways or is absolutely volatile. Because we are addicted, we can not stop to take a position and we enter. We do it just because we want to do it and for no logical reasons or analysis. This may prove very-very costly if this happens in a pattern and time and again. There are times when it is better to be away. Always ask the following questions before taking a position:
- Am I reasonably sure that the market would move in the direction I am expecting?
- If I am reasonably sure then what are the reasons that I am reasonably sure?
5) Stop-loss orders too close or too far:
- Stop-loss orders too close: You are subconsciously or consciously worried that market may go in opposite direction to what you are expecting and you want to cut your losses to minimum
- Stop-loss orders too far: You are subconsciously or consciously worried that market may go in opposite direction to what you are expecting and you don’t want to have your stop-loss order closing your position before the market reverses and moves back in your expected direction.
Well, in both cases there is a feeling in the sub-conscious mind that market would go against your expectation. Then why are you taking that position? Listen to your sub-conscious mind because many times that’s you Guardian Angel. When you are unable to decide to have a stop-loss at a reasonable distance, the position you are taking is the position you are not reasonably sure about. Don’t take it.
6) Take-profit orders too close or too far:
- Take-profit orders too close: You are subconsciously or consciously worried that market may go in opposite direction very soon than what you are expecting and you want to take profit before it reverses
- Take-profit orders too far: Trying to kill all birds in one shot? make all the money with one trade?
Well, if you are keeping your take-profit orders too close having a doubt in the mind that the market may have a reversal soon, why are you entering the market in the current or expected direction?
And no-body becomes rich in a day. The market moves in a cycle. In a trend also it will stop, take a breath, have some reversals/corrections before it continues its journey. And we can not be sure whether at that time it would continue the journey to the same direction or would reverse to opposite directions. Do not keep your take-profit orders too far with too much optimism and too much greed. Also do not keep those too close to take a quick profit. There is nothing like a quick profit or too much profit. Being reasonable only brings us reasonable profits.
7) Learning from the past mistakes and then making a bigger mistake:
Learning from past mistake is always required but not in absolute terms. In a dynamic market like FOREX. what was true last time may not hold good in the current possibly changed situation.
One example of this was earlier in this article that we put stop-loss order very close in one trade. The market goes against us and our stop-loss order closes our position and we make a small loss. After meeting with the stop-loss order the market reverses the direction and goes in the direction which we had expected. We learn from this mistake and next time we put the stop-loss very far. The market goes against us and keeps on going against. We end up having a much bigger loss when our stop-loss order closes our trade.
There could be various ways we can make such mistakes. Suppose we have been expecting the market to go up. We buy and it goes down and we make a loss. We buy again and make further loss. After some time we get frustrated and we short-sell. The market moves up and well… another loss. Every new trade is a fresh start. Learning from the past failures and successes is important but those failures and successes should not influence the current trade. All trades are different, all market situations may be different.
If we are impatient and restless in nature we would end up making such mistakes, If we are not very detail-oriented person, we would end up making this mistake. And again we all could make such mistakes but if it happens often and as a pattern then it is dangerous. Watch out for this pattern. In a dynamic market, the strategies also need to be dynamic. Check about your decisions about entry points, exit points, which direction to enter (buy or short-sell), where to put stop-loss and take-profit orders and what should be the position size. Check if any of these decisions is getting influenced by past losses or past profits. Consider all current factors, analyze those and take a fresh decision.
8) Loving our trades and bias for the market direction or figures:
As far as loving our trades and bias for market direction is concerned, this point is similar to point number 3 above. Many of our decisions would go wrong in our trading and that’s the reason that a good Risk-Reward ratio has to be maintained for stop-loss and take-profit orders. If we are biased about the market direction, our trades or simply the numbers, we would fail to hear what the market is telling us. It’s important to hear what the market is telling us than to go ahead only what we think.
Being biased for the figures can happen in two ways. Bias for the price of on currency pair or being biased about the profits we want to make out of a trade or during a period of time.
- Bias for the price level: Sometimes we may get stuck to the idea that certain price level is the normal price level for a currency pair and the pair would come back to that level regardless of the current movement. For example if we have seen USD/JPY to move a lot in the range of 115 to 125, we may start thinking that 115 should be the normal level for this currency pair to reach even if its trading at 95 currently. Well, in all probabilities it would happen but while it can happen in days, it may also take months before it goes to that level. It may go down to 80 also before reversing the trend. Don’t have a fixed idea about the normal price level. There is nothing normal in market. Market always has surprises for us and we need to be ready to take the surprises as normal and that’s the only differentiation between a successful trader and unsuccessful trader. The successful trader is always ready for the surprises.
- Bias about the profit levels: Well it may happen either when we have made a good profit in recent past or have made great losses. We may end up thinking that we need to make at least so many Dollars every day or every week or every month. We are putting ourselves in pressure for the goals which, even if, are normal but may not hold good during every period. For example we decide that we need to make a profit of 5% every week. Well, that’s perfectly normal but only on average basis. We may be able to make 100% profits during one week and end up having big losses during next two weeks. Out of the panic that we are not meeting our targets, we could make some wrong decisions and that would further add to our losses. A goal for desired profits is required but not for very short periods like every day or every week. Do it for little longer time frames. And even if you wish to do it for shorter time frames, don’t panic. It’s the average profitability which counts. Fix up the goals but don’t panic.
9) Trading too big for your account size:
It’s practically impossible to buy when the prices are at the rock bottom and take profit when they are at the peak. Similarly its not possible to get the peaks for a short-selling trade. In other words it’s simply not possible to pick the peaks and bottoms most of the time. We buy and though we are right in our analysis that the price will go up but before going up it may fall further, even below our stop-loss order. It’s better to have the stop-loss order at a reasonable distance than to have a stop-loss close and have a big sized position.
Check if you are a day dreamer. There is nothing wrong with being day dreamers but those of us who do a lot of day dreaming may end up making this mistake often.
Don’t think about how much you can make, keep in mind how much you can lose in any particular trade.
10) Varying the position size of your trades:
Well, we are continuously in profit and we multiply our position size in the next trade and it goes in opposite direction. Or we are losing continuously and we decide to multiply our position size expecting a gain which would balance our losses. Or we are continuously gaining and we make our position size very small for the fear of losing in the next trades and we make small profits again. Now we decide that we made a mistake by entering the market with very small position and we try to correct it by entering very big in the next trade and Oooops…!!!, the market goes against us. It never pays in varying the position size because of panic, greed, optimism or pessimism. Keep the position size balanced and not only thinking of what you can lose or gain but what profit size is reasonable and how much loss you can afford reasonably.
11) Not looking at both, the long-term and short-term picture of the market:
If you are following only the daily chart, your technical indicators or fundamental analysis may give you a clear picture to buy. But the short term chart may tell you that before going in the expected direction, the market may take a plunge. Similarly your short-term chart may be showing a trend in one direction and you enter the market with expected take-profit goals and stop-loss possibilities. But the long-term chart may give an entirely different picture and may tell you that your expectations about the profit and possibilities of loss (risk-reward ratio) or even the market direction is wrong. Keep an eye on the longer term chart (daily & hourly) and shorter term chart (30 minutes and hourly).
12) Not using the stop-loss order- THE ULTIMATE KILLER:
The only thing we would like to say about this point is that “SIMPLY DON’T DO IT”.
You may be afraid that the market going may go to the opposite direction before it goes back in your expected direction or you may be too confident that even if it goes in opposite direction, it would go back in your expected direction. Well, both fear and confidence here are pointing towards the same thing that you are not confident about your decision. PLEASE PUT A STOP LOSS ORDER AT REASONABLE OR EVEN UNREASONABLE LEVEL. If you don’t like it, its better to stop yourself from trading before one day the market stops you forever.
