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How to Overcome the 3 Common Psychological Mistakes Made by Traders

How to Overcome the 3 Common Psychological Mistakes Made by Traders

Emotions are the enemy of traders, however certain emotions are particularly damaging because they start the trader down a long path which will end in self-defeat.

Much trading advice has been written about fear and greed so we are going to cover a more emotion: discouragement.

Discouragement rarely hits all at once, but accumulates over time in response to ongoing series of setbacks and failures.

As losing trades pile up, we gradually become discouraged with our own failures. This seems like a natural response to the situation, so we often fail to recognize the danger we put ourselves in.

Discouragement feeds on itself and can become a self-fulfilling prophecy. Failures bring discouragement, discouragement brings reduced effort, and reduced effort brings more failure and becomes a downward spiral.

In trading, this series of failures usually takes the form of a streak of losing trades. With no winners to break the cycle, the trader can increasingly become frustrated they watch their account shrink.

Sometimes even winning trades can make things worse emotionally.  If you’ve traded even moderately, you know what I’m talking about when I say that during these “cycles of losing trades,” it seems we always manage to close the winning trade for negligible profits only minutes before the market explodes in the direction we were hoping for all along.

I don’t think this is likely to be coincidental, and may be a result of our own negative mindset and part of the “self-fulfilling prophecy” of discouragement.

Most likely all traders has encountered this type of setback cycle at least once and probably more than once in their lives and trading careers.

Ultimately this discouragement is an internal response to external events and that is good news. While we cannot control the market we can control our reactions to the market.

The fact is that sometimes our only weapon against forces larger than ourselves is our freedom to choose our reactions. Of course sometimes choosing a positive reaction to a negative event is easier said than done, especially when life seems to be kicking us while we’re down.

It is absolutely critical to keep these negative emotions in check, because even moderate discouragement will create a self-fulfilling pattern of failure if not halted immediately.

So what are these pitfalls that lead to discouragement and how can they be overcome?

Mistake 1:  Being overly critical when we’re already down on ourselves.

One of the worst things we can do to ourselves is to become overly harsh and endlessly self-critical at moments when our self-esteem is already suffering.

We may speak to ourselves in ways we would never even consider speaking to another person. This negative self-talk can be extremely damaging to us.

We try to justify this talk by telling ourselves it’s a form of “tough love,” and that we’re using this criticism as motivation to improve. How this harsh self-talk does not motivate us when we’re already down, all it does is discourage us even more.

If you just had a losing trade, beating yourself up doesn’t help.

When our self-esteem is taking a beating, the best way to position ourselves for future success is to nurture that esteem back to good health by focusing on the positive things we know are true about ourselves.

Not to crush ourselves even further with negative self-talk.

Mistake 2:  Quitting before the battle is over.

Another common mistake is to quit before the battle is lost. This is a self-defense mechanism it is a way to give ourselves the illusion of control by giving up before we are involuntarily defeated.
This can be the toughest of the three pitfalls. This is because there are times when it is correct to give up. So we have to understand both ourselves and the situation to recognize when giving up is the correct course and when it’s an emotional cop-out.

Many times we quit not because the situation is hopeless but because we’re discouraged and tired of the struggle.

The average millionaire has gone bankrupt more than three times in his or her lifetime.  What separates those folks from the rest of the pack isn’t luck, but the internal perseverance to pick themselves up off the floor and try again even after repeated failure.

If your goal is to go from being a losing trader to a profitable trader the only way to achieve that is to apply techniques you are not currently using. Those techniques may initially seem foreign, unnatural, and uncomfortable.

I believe there are very few things in life we cannot achieve if we genuinely apply every last ounce of personal effort and willpower.

Mistake 3:  Not releasing ourselves from our mistakes.

While it’s important to reflect on our mistakes, the only point to do that is to learn the lessons from those mistakes. Once the lessons are learned then it’s time to move on.

Say we just exited a losing trade where we committed two large mistakes.

1st, The trade was entered based on emotion and took a high-risk entry.

2nd, Then we committed way too much of our account in the position.

As a result of these two mistakes, we lost 50% of our account in one fell swoop. We are in a bad place emotionally; in fact we spend a lot of time feeling sick to our stomach wondering how we could have been so stupid.

As we sit down and try to figure out what went wrong and eventually figure out our mistakes. Then do some more thinking and figure out ways to avoid those mistakes in the future.

At that point stop!  Your work is done and it’s time to move forward with the newly found insights.

We just keep rehashing the mistakes we made and think, “Wow, if only I hadn’t done this!”  I can’t believe I just lost xxx thousands. That could have been my early retirement! I could have bought a new Mercedes!

Instead of learning the lessons and moving forward we just keep dragging the past around with us in discouragement.

It’s as if we stepped in a big pile of dodo while walking down the path of life, but instead of just wiping it off our shoes and continuing, we’ve decided to leave it on as a permanent and unpleasant reminder of our mistake.

Nothing can be gained from this manner of thinking.

Leave the mistakes behind BUT take the lessons with you!

-Robert Walsh

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