Trading presents significant challenges. These often lead to mistakes, particularly when human psychology clashes with the discipline required for optimal trading. Common pitfalls include overtrading, especially when attempting to "fight" market moves, and stubbornness in holding onto losing positions. Let's explore these and other prevalent mistakes that can hinder a trader's path to success.
- Mistakes are very common in trading and arise due to classic psychological mistakes.
- Despite being natural, these mistakes can complicate a trader’s path to success.
- Recognizing the most common mistakes is the first step to achieving optimal trading psychology, which allows you to cut losses sooner and let winning trades run. While there is always a level of inherent risk associated with trading, effectively managing risk is crucial to success in the markets.
The relationship between trading and making mistakes
Trading is a complex activity requiring a rigorous work ethic and determination to find the best recipe for success in markets.
However, the path to success comes with many hurdles.
Psychological reactions to making and losing money can trigger vivid reactions and emotions. This is part of the reason why fear and greed are such prevalent terms in this field.
These reactions and emotions create classic mistakes nearly every trader makes before reaching the next level in their trading journey.
Even legendary traders like Jesse Livermore or investors like Warren Buffett have made countless mistakes.
Hence, the relationship between trading, particularly successful trading, and mistakes is very tight.
Recognizing the most common mistakes made by traders and understanding why they arise will help you to correct your attitude and aim for the best performance.
Three of the most common mistakes traders make
Overtrading
Overtrading is maybe the most classic mistake made by traders.
The nature of this activity is to attempt to generate money and avoid losing it. Therefore, a beginner can often get caught in a session, trying to break their record, catch up with their losses, and capture every possible move.
This would lead to a blurred reading of the market and trading while most players are off their screens, which would increase transaction costs and cause wrong signals.
Sticking to a losing trade
A common psychological mistake is having a losing position and thinking that, while the trade isn’t closed, the money is not officially lost.
At that moment, the position becomes personal, which can make a trader blind to obvious moves and surpass risk management rules.
This could also lead to hope, a trader’s worst enemy.
We will explore why in the second piece of this series.
Trying to bounce back/fighting the trend
Losing money can create a mental imbalance that urges traders to recover what they lost.
While focusing on recovering financial loss, traders can take trades without respecting their game plan or considering the state of the markets.
This can lead to a worsening effect, magnifying losses.
Identifying traders' typical mistakes is only one part of working on optimal trader psychology.
Fixing what can go wrong is a first step: Working on one’s pre-existing attributes is also a key to developing one’s edge.
A trader can and should focus on pre-existing qualities to further enhance and maximize performance.
This is an invitation to check out this initiation to trader psychology, exploring the brighter side of emotions in trading: “Understanding how basic emotions could influence your trading decisions.”
In the upcoming weeks, we will explore each mistake in detail through our “Most common mistakes traders make” series to forge an optimal trader psychology and enhance long-run, consistent performance.
This article is for general information purposes only, not to be considered a recommendation or financial advice. Past performance is not indicative of future results. It is not investment advice or a solution to buy or sell instruments.
Opinions are the authors; not necessarily those of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors.
Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and is not suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks. Losses can exceed deposits.
