Whether you admit it or not, psychology plays a huge role in your daily trading. Every day we make hundreds of decisions that we do not actually have control over — our brain uses autopilot programs to help us navigate through the world. Most of the time it is actually a good thing. Life would be exhausting if we had to think about every breath or every step we take when we walk.
However, these programs can take charge of our decisions and actions in moments, when it is unfavorable for us. For instance, there are many trading decisions that we make under the influence of these reflexes. Let’s see how this may impact the trading approach of traders.
1. Fear of loss
Losses are a natural part of trading and every trader knows that. However, many traders are so afraid of it, that in their attempts to avoid it, they start acting irrationally. For example, some traders keep a losing deal in hopes that it will reverse. In the end they close it with an even bigger loss than before.
In a trader’s mind, losing is a very big deal and he or she should do their best to turn a loss around. This is part of our nature: fighting an outcome that is bad for us. In reality, losing is a normal part of a learning curve and it is important to be able to deal with an unprofitable outcome.
However, when traders stick to their trading plan and utilize risk management tools every time they trade: setting stop loss and take profit levels, as well as planning trade exits, then it can be manageable.
2. Accessibility bias
Our brain is wired in a way that makes us believe our latest experiences to be the truth. While often the knowledge that we have immediate access to is not accurate, instead of doing careful research, we take whatever our brain tells us for the real thing.
For instance, many traders suffer from their own experience. They find a strategy or an indicator, and try to implement it in their own trading. However, instead of generating an outcome, they lose their funds several times in a row. Their brain tells them that this strategy or this trading instrument simply doesn’t work. Is the strategy really bad? It might be. However, the trader doesn’t actually know it: their brain just tricked them into assuming this.
The thing about personal experience is that even though it is the most accessible knowledge we have, it is based on a very small amount of data. Until the necessary research and testing is done, relying on the most immediate experience might be harmful.
With that said, it is important to be able to drop a strategy, if it does not work for you. However, make sure to test it out thoroughly on the Practice account before you consider it useless.
3. High expectations
This involves expecting outcomes, but without any real trading approach. Traders expect the circumstances to fall in place and generate a favorable result, without any effort from their side. It is very easy to look at the chart and notice hundreds of good entries that one could take in hindsight.
In reality, however, positive results can only be achieved with the necessary analysis. There are dozens of different assets, among which a trader has to find the right one, and after that decide on the correct moment for an entry and exit.
Another expectation that many traders have is receiving a truly big return every time. High outcomes are rare and traders need to tame their excitement and look at the situation rationally. Set your realistic goals and try to follow them closely, instead of getting impatient and greedy.
As you can see, our brain definitely plays a huge role in every part of our life, including trading. While it might be hard to escape the familiar patterns, even a small conscious effort has the potential of improving your trading approach.