Fear and greed are the number one causes for the common mistakes most traders make when trading. Fear and greed normally come before trading, during and after trading.
When you are under fear or greed, you are likely to commit these mistakes most traders make;
- Get into trades too soon before your trading strategy confirms
- Enter into trades too late after your trading signal has confirmed
- Convince yourself not to take a loss that it will return to your predicted direction any time
- Jump out of winning trades too soon and settle for small profits
- Move your stop loss further when its about to be hit or remove it completely
- Move your stop loss close to entry only to get stopped out and the market moves back as you predicted
- Never cut losses but instead close with very large losses
In the previous article we looked at how one can grow his or her account consistently. However, if you still find yourself prone to these mistakes, it’s obvious that you may never achieve that goal.
So, let’s now look at some of the common mistakes most traders make and how to avoid them in a detail.
The Emotional Trading as one of the Common Mistakes Most Traders Make
Emotional trading comes in after you have either made a large loss on your account or a large profit.
Forex trading is 90% by mind. This simply means you need a clear mindset to make any decisions to trade or when trading.
Your trading strategy will tell you where to enter a trade, plus the rules to follow to trade but you need the psychology and the discipline to help you stick to those rules.
Emotional trading is likely to happen after two scenarios.
- After making consecutive wins
- After making consecutive or large losses
How do you feel and react after making consistent wins?
Do you feel happy, excited, confident or you feel like you’re now in control of the market? Watch out.
At this point, you are next to making trading mistakes that will cost you.
You may start to feel like you deserve to win so the market has to move to your direction no matter what.
Because you have a lot of confidence, you are likely to start overtrading since now you feel you’re in control of the market.
Taking trades with very large position. This is because you are sure the trades will work out and so why not make large profits.
Last but not least, you may not see any need for you to continue following your trading rules.
All the above are the signs of emotional trading as a result of making consecutive wins.
It is good to be confident when trading but overconfidence is absolutely bad. Once you realise this kind of change in behaviour, it’s best to first take a break and review those changes.
How do you feel when you suffer consistent losses or a very big loss?
Do you feel scared, hesitation, disappointed, frustrated, regret or hopelessness?
If you experience these kinds of emotions after closing out a losing trade, it’s obvious that the next trades you take you are likely to make more mistakes.
Suffering a huge loss on your account is likely to cause you fear if you don’t keep your emotions intact.
As a result, you will experience, regret, disappointment, frustration to an extent that you feel like trading is not a thing for you.
What happens next, you want to get back what you have lost because you feel it’s really not fair. Therefore, most of the trades you take are not objective. You are trying to revenge to the market.
First you are likely not to follow your trading rules
You will find yourself hesitating to take trades even when your signal has confirmed or jump into it when it’s long gone.
You start to close trades in small profits because you are scared it may go back again to loss.
In the end, you use tight stops and all you get is stopped out.
All this adds more frustration and stress which is of course not good for your trading.
Any decisions you make now are driven by your emotions which is number one cause of the common mistakes most traders make.
How to avoid Emotional Trading?
Forex trading has been here many years ago and is here to stay. You have five days to trade in a week so it is very okay to miss a day or a week, a month or even a year without trading.
Take a break, review yourself and find out what the main cause of your mistakes. Read, talk to a mentor.
Train yourself on how to trade with a clear mind set. Practice on a demo account until you master the discipline to follow your trading rules. When you feel you can control your emotions, come back and start to trade again. This time do it right.
High Expectations vs reality
Forex trading may look easy on the charts, with prices moving either up or down but it’s beyond that.
Before you started trading, you were told to buy when the trend is moving up and sell when the trend is moving down.
And with a perfect strategy, you will hit a holy grail. So, all you need is to predict where the market is going and you have your money. I wish it was that easy.
Like you plan and start to run a business, the same goes to forex trading. It is a process and it has the highs and lows.
The reality is, the forex market is more complex compared to a business. This is because, it involves many participants across the world and is mostly driven by emotions of these participants.
Having high expectation from the market is also one of the common mistakes most traders make when trading. You take trades and then expect the market to behave the way you want all the time.
You forget that you’re trading with a trillion traders from all over the world who also have their own intensions, think and act differently.
As a rule of thumb, before you make any decisions in the market, you must know that the forex market comprises of different types traders.
To mention but a few, the commercial banks, hedge funds, brokers, retail traders, commercial companies, central banks and the speculators.
If you are here to buy and sell currencies to make a profit, then you fall under the speculators. So, it’s now clear that you deal with people who hold very large positions compared to the accounts you hold.
Secondly, the price movements in the market happen as a result of participation of these traders. Therefore, it’s the traders’ decisions or behaviour that drive the market.
Your expectations;
If you think all you need is to buy as price moves up and sell when price goes down to achieve that a million-dream profit, you have it all wrong. The reality is different.
Every time you take a trade or make any decisions in the market, you must not forget that there is someone else in the market exiting or taking a trade which of course may affect your decisions.
In the forex market, anything can happen, and you never know when. Every time you take a trade, you should expect two out comes. Either a loss or a profit. The earlier you align your mind with that, the better.
Trading with no Risk management
Trading with no risk management is the commonest of the mistakes most traders make when trading. Many have lost their accounts several times because of this.
Trading with no risk management is like sitting on a double-edged sword. Anytime you may face its wrath.
Risk management are tools put in place when trading to help you control your losses and at the same time have a good reward. Examples of risk management tools include; stop loss, risk to reward ratio, proper position sizing.
With no risk management, you expose your account to large losses or may lose it on a very bad trade.
It’s one of the common mistakes most traders make or find themselves doing especially trading with no stop loss. Without a stop loss, you expose all your money on the table.
As the market goes against you, the loss keeps on accumulating and you find yourself tide up to a point that you just hope the trade comes around.
Trust me, this will cause you a lot of frustration to an extent that you won’t know what to do anymore.
Not until the trade draws all your money and closes or suddenly moves to your favour will you be able to have a clear state of mind.
This can also be as a result of using a very large size to trade compared to your account.
Aside from getting your trading emotions intact, and having measurable expectations when trading, risk management also plays a big role to your trading success.
Why you should use Risk Management?
Risk management helps you to know how much you will risk on every trade you take. It also tells you how much you will loss in case a trade goes against you. Besides that, you are able to know how much you will make if the trade goes to your direction.
For example, if you put a stop loss on your trade, when a trade goes against you, it will close as soon as it hits the stop loss level. When a trade closes on stop loss, your mind stays clear and you are able to look for the other available opportunities. After all you pre-determined the loss before taking that trade.
Final word.
For you to become a consistent trader, you must mind the way you act, react and think about the market.
Like I said earlier, trading is not all about buying when price is going up and selling when price is going down. It involves a lot of factors to consider.
You need to do analysis, consider other trader’s sentiment in the market and the fundamental economic factors.
When you trade with no stop loss, you miss on the new opportunities in the market because you have no margin. At the same time, you lose all your money because the pain of closing in a large loss is unbearable for you. This in turn leads to emotional trading due to fear to lose more.
It is very important to stick to your risk management tools to avoid making reckless mistakes and to protect your account.
