Psychology of Trading: Most common mistakes

Forex Most common mistakes

Last week we presented a report on the psychological mechanisms that act on forex traders, and attributes that a professional trader should have. Well continuing with the same spirit, today we bring you a list of major mistakes and errors incurred for the same cause.

1.    Pride. Many traders sin of pride, and when they win three or four transactions in a row, they think they know everything when in reality there is always more to learn, much of which is accomplished through long hours of practice. Excessive self-confidence can generate serious errors, not to mention the great disappointments that befall any loss. The ability to accept mistakes and learn from the experience will help to overcome them and build a solid career as a professional trader.

2.    Lack of Confidence. It is the opposite of previous the flaw (pride and arrogance), but with similar negative consequences. Lack of self-confidence creates fear, which paralyzes the trader to limit his ability to reason and analyze price movements clearly. The design and the followup of a proven strategy and a reasonable period of practice can help build confidence and control fear.

3.    Blindly Following of Indicators and signals. This is one of the most common psychological weaknesses. In the first signal (example: a news alert or past alert), some traders are to be the first to enter the market without really analyzing the reasons for certain movements, or the impact of the economic data reported, or simply wait confirmation of the same (usually suffer some changes later). And then, once given the “false alarm”, they are in losing position.

4.     Greed. The desire to win more and more is one of the biggest weaknesses of forex traders, and against a raising market they often fail to withdraw in time with its earnings before they fall. The key is to take appropriate timely gains and not to take try to get the “complete” trade from top to bottom. Therefore, it is advisable to place a reasonable stop loss before trading and respect it no matter what.

5.     Over-trading. This is another big mistake made by forex traders, risking more than their margin can absorb. Focus yourself on the “quality” of each transaction and not on the “quantity”. Experience suggests that you should not use more than 10% margin in forex trading.

6.     Laziness. Sometimes due to time constraints, sometimes due to negligence, some traders postpone the planning of an effective trading plan, including the criteria to enter and exit the market, and a plan for managing money. This leads decisions by impulse or intuition, which is a serious mistake, especially in peak time; the traders are influenced by their own emotions and fears. Investing in the time and dedication necessary for the design and testing of a cost-effective strategy, and their subsequent application, you will avoid many headaches later.

7.    Impatience. Impatience usually leads to enter and exit positions at the wrong time. Learn to recognize this emotion in yourself and identify the moments that usually occur. This will help you control it. The discipline to faithfully follow the plan designed helps prevent impulsive actions caused by anxiety.

8.    Fear and Indecision. After several failed transactions, and their respective losses, traders lose self confidence and become fearful and hesitant, which leads them to close positions with minimal gains to avoid any loss. In fact, the rule should be: Leave early losing positions (no more waiting for the market to reverse the situation), and wait patiently while you are winning.

9.    Obsession. Spend hours and hours looking at your computer. All the charts and indicators do not ensure success in trading. While a certain amount of information and analysis are essential, no fundamental or technical analysis alone can predict the market accurately; there are many other factors that also impact on the daily fluctuations. On the other hand, although impulsive behaviors are not recommended, it does share some common sense and intuition when it comes to trading. Too much analysis will lead to poor time management, scarce and highly valued at present.

10.    Expectations. Consider reasonable and realistic goals for a career in forex is essential to avoid further disappointment when the results are not achieved. Remember that the forex trading business is a high volatility, so that losses become a natural part of the process. It is essential then to understand that the most important are the profits in the long term and not on every transaction. When expectations are met, it generates more enthusiasm and desire to continue learning.

What to do with mistakes?

The first step is to accept mistakes as opportunities for learning, and approach them in a positive form to avoid frustration.

Once this position is adopted, be able to devote in identifying what went wrong and to investigate its nature, to avoid falling back into it. Make a list of current and potential consequences of the error in question and determine what the learning experience is.

Finally, take the necessary actions to ensure that you have learned your lesson and that you will not fall into this error again. To do this, surely you must modify your behavior.

Learning from your mistakes makes you change your negative connotation to a positive one.  This will help in your favor by enriching your learning’s and experiences throughout your career as a professional trader.

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