Common (Psychological) Trading Mistakes

Introduction

In this chapter, we will take a look at some common trading mistakes. In some ways all of these fall under psychology in one way or another. More important than the psychology behind these blunders though, is simply being aware of them, and then avoiding them.

With that said let’s get started with four common trading don’ts. If you have already made any of the following mistakes, it’s very likely that you already know how destructive they can be.

 

The Bait and Hook

The most common mistake that Forex traders make is simply jumping into trading to quickly, and without proper planning. We will call this mistake the bait and hook. The easiest way to show this particular mistake is with an example.

 

Larry’s Mistake – A Bait and Hook Example   At 45 Larry has discovered the world of Forex. After using a practice account for a while, and learning the basics, he moved into using real money and is doing okay. He has grown his first account from the $10,000 he started with to $13,000 in only one month.   Now comes the bait. In this case, the bait is the allure of all the possibilities that can be had with a profitable Forex account.     The Bait Currently, Larry works as an ad executive. He isn’t rich, but he does okay. After working at it for 15 years he is one of the tops in his field, and he has finally banked some money.   Even with all of that, Larry has been considering a career change for a while. There are so many things that he has always wanted to do, and he feels that the 9 to 5 grind is holding him back. Now, he is beginning to see Forex as his opportunity to do just that.  He begins to make a list of reasons he should move to trade as his career:

 

1.   I could work from home, and have more freedom. 2.   I can finally take my wife on that trip. As long as I have internet access I can work. 3.   As long as I can make the bills, I will be fine. If I can make $3000 in a month with a $10,000 account, then it stands to reason that I will be making $15,000 when I put $50,000 into my account. 4.   I can quit my job, and enjoy life more. 5.   I can continue to work and make good money through my retirement.     The Hook With dreams of travel and an easier life, Larry follows through on his idea. He takes his extra $10,000 in savings, cashes in a few investments, and grows his Forex account to $50,000. He tells his boss to take a flying leap (he always wanted to do that), quits his job, and begins working from home.   It seems that Larry may just have it made, or does he?

 

There are some major problems with what Larry just did, and if you don’t see them you could become a victim of this same trap. This really is the mistake that leads many traders to failure (and some to bankruptcy).

1. He was just learning – Even though Larry had made a profit in his first month trading with real money, he’s really just new to Forex. He hasn’t made the mistakes that most traders make yet, and he only really knows the basics of trading. In reality, his profits from the first month were more likely luck than skill.
2. Suddenly his life depends on turning a profit – The worst part of what Larry has now done is put himself in a position where he requires an income from Forex. There is no – “let’s take our time and learn to do this right” – instead, if he doesn’t make money at Forex he won’t be able to pay his bills.

When Larry was trading with his small account, and still had the promise of a monthly paycheck, there wasn’t a lot of pressure. He could take his time, select his trades right, and spend time learning the markets themselves. Now there is an insane amount of pressure to make money with his account.

What usually ends up happening in this situation is that the pressure to make money leads to bad trading decisions. The stress of those bad trades leads to more bad decisions, and so on. In a couple of months that $50,000 account is virtually erased, and Larry’s dreams of travel are even further away than they were before.

Before deciding to turn Forex into a career there should be a few key elements in place.

1. Money – You should never put your entire life savings on the line for anything. There should always be something to fall back on.
2. Knowledge – With something as big as Forex a few months is not enough time to really learn what you are doing. You should have a fairly in-depth knowledge of trading which comes from a couple of years of work.
3. Practice – Again, a short period of time isn’t truly enough to gauge your possibilities of success. If Larry had taken a year or two to grow his small $10,000 account first, he could have left his savings in the bank. He would then have more experience trading, and less to lose should he have a bad month, or make a few bad trades.

 

Ignoring Frustration

Another common mistake that traders make is becoming emotional. Back in chapter one, we did say that all of our trade decision will be affected by our own psyche, but in this case, it’s the more subtle emotions rather than your psyche that can lead to both bad trading habits, and bad learning skills.

What I’m really talking about here is a subtle emotion. Some would call it fear or frustration. Others may simply refer to it as feeling slightly overwhelmed. To clarify let’s return to our friend Larry, and use him for another example.

Larry’s Mistake #2 – Ignoring his own Frustration   After his first month working at home things aren’t going as well as Larry had planned. Last month he did make a profit, but it wasn’t the $15,000 he was expecting. Instead, Larry’s monthly total was $500. Now he is beginning to worry. He didn’t leave himself any fallback money so if he doesn’t make a profit next month he may have trouble meeting his bills, or have to send his wife to work.   Larry, being the resourceful person he is, finds a solution. He pays for an advanced Forex course and begins to work his way through it. The course teaches a trading system that is proven to be effective.   The Problem As Larry works his way through the course, he constantly finds himself feeling slightly frustrated. The material is quite advanced, and his knowledge isn’t sufficient to completely understand it.   Not wanting to admit that he’s not as intelligent as the next guy, Larry ignores the slight feelings of frustration and assumes he will get it as we work with this new system. There are unanswered questions that keep coming up in the back of his mind, but for the most part, he feels that he gets it and he continues on.

 

There are two major problems with what Larry just did.

1. Set himself up to fail: By ignoring those subtle feelings as he worked through the material he has set himself up for more failed trades. Without a clear understanding of the system he is much more likely to make bad decisions, and in turn – lose money!
2. Enforced bad learning habits: Along with a greater likelihood of failure, Larry also just enforced bad habits. Not willing to admit that he wasn’t as smart as the next guy, he didn’t bother to ask questions, or to research further to gain clarity. This will work against you when you learn new material, and it does become a habit and works against learning for many people.

What Larry should have done was stop as soon as that slight frustration came up. He should have then backtracked and learned what was missing. By doing so he would have gotten a better understanding of the system itself and lessened his chances of failure.

To put it simply – If you do find yourself feeling slightly frustrated while you read through the morning trading report, that next big trading system, or any other material related to Forex – stop, backtrack, and figure out what you’re missing. This extra step will add clarity and help you to go further in your success as a trader.

 

Staying Stuck in a Rut

Another common problem among traders is simply not moving forward. The concept can be considered “being stuck in a rut” you may also refer to it as overthinking or underthinking. What I’m talking about is the human tendency to do things the way that you (or someone else) says they should be done and assuming that if you just keep working at it you’ll find success. We keep doing things the same way, over and over, simply because that is the way we have always done it or how we were taught to do it.

When it comes to something as large and complex as Forex trading, hard work and repetition are rarely the answer. It is important to always think outside of the box, so to speak, and make progress in your learning and in the way you trade. If you spend all of your time thinking and acting the way everyone else does you’ll rarely find success as a trader.

Even if others are successful, doing things the same way, doesn’t mean that you’ll also find success working that way. It isn’t a matter of hard work. It’s a matter of finding something that works for you. Don’t let yourself stay stuck in a rut simply because someone else says “this is how it’s done”.

Yes, you need rules to trade with, but that trading system should be tailored to, and honed by you!

A Look at Laziness

I wanted to finish this chapter by talking about being lazy. In the context I am using it, I am not meaning it to say that one common mistake among traders is just being lazy. Instead, I am going to talk about laziness in a different context. I will cover the way some of us train ourselves to be lazy, and a few other problems that may cause someone to avoid being productive.

Before we begin let’s define the term laziness. From websters dictionary we get the following definition:

laziness – disinclined to activity or exertion: not energetic or vigorous: encouraging inactivity or indolence

Synonyms for laziness include words such as: slothful, lax, sluggish, etc. In other words, being considered lazy is not at all synonymous with something healthy.

When you work for yourself, in a capacity such as trading, laziness can make your life more difficult. If we don’t find ways to be productive (through learning, trading, and working in general) moving forward in our career will be difficult. Let’s look closer, and you’ll see why I wanted to cover this in the common mistakes chapter.

The Big Secret about Laziness

Here is the big secret about being lazy – most of us are trained to act that way!

Of course, we don’t literally take a being lazy course and hope to get an A+, but it is something that is ingrained in many of us because of the way we work.

When you started your first-day job, whether that was ten years ago or fifty, there is likely something that you began to notice very quickly. Suddenly you were in a position where if you weren’t doing what was expected from you, others (your boss in particular) considered you to be lazy and the rewards weren’t good ones at all. On the other hand, if your boss saw you as hard-working then possibly you were showered in praise and received rewards to fit your hard-working status.

In most roles there are always times when we aren’t busy, but since you already know that rewards come with hard work something happens. We develop the habit of “appearing productive”. Even though we may not actually be doing anything truly useful, as long as we appear to be productive, the boss is still happy and the rewards keep coming.

When you begin to look at your coworkers you notice they tend to do the same thing. Even your manager is doing it. He has someone else to answer to, so he works to appear busy by coming and bugging you to ensure you also appear busy.

The key term in everything we just said is “appear busy”. It is a form of laziness that can be very destructive to your new trading career. The worst part is that most of us don’t even realize we are doing it. Trained laziness is a problem that is both difficult to recognize and is the most difficult type of laziness to overcome.

Being aware of it is the first step in ensuring that you don’t fall into the “I appear productive” category. If you do find yourself doing this, correct it. Find something that will help you improve as a trader.  You no longer have anyone else to prove anything too, and appearing busy to yourself won’t get you anywhere. If there is another reason for laziness, then it is very important that you discover your reasons for inaction and work to resolve them.