Human behavioral flaws could be duping traders into making psychological trading mistakes. The rigging of markets could start in a trader’s mind, bearing in mind that human emotions, fear, greed, and rage/anger are all being plugged to lure traders into making psychological trading mistakes.
So how is a trader’s mind being played into making psychological trading mistakes?
Let’s identify three main psychological trading mistakes and what we can do to overcome them.
“human emotions, fear, greed, and rage/anger are all being plugged to lure traders into making psychological trading mistakes”
Top on the list of psychological trading mistakes is F.O.M.O (an acronym for fear of missing out) trading
Driven by greed and fear the F.O.M.O trader is the eternal optimist. He or she is driven by the idea of making big profits. F.O.M.O traders delude themselves into thinking that this is the big trade, they typically enter positions all in and highly leveraged.
The F.O.M.O fears missing out on opportunities, moreover, greed lures these traders into taking oversized positions.
The problem with F.O.M.O is it causes traders to over trade and increase their position size.
“Driven by greed and fear the F.O.M.O trader is the eternal optimist”
So what is the cure for F.O.M.O trading, just one of these psychological trading mistakes?
Say to yourself that trading is full of many opportunities, if you miss this one don’t worry there will be many others.
When Warren Buffett was asked about missing out on early investment opportunities in Google and Amazon he said, “we will keep missing them, our secret is that we don’t miss them all.” So if top investors aren’t worried about catching every opportunity, why should you? Missing trades is part of the game, it will happen.
Also try staying out of chat room, social media, and trade alone to cure F.O.M.O.
If you can’t find trades you may need to study entry and exit strategies, see home study course.
“Revenge traders are fuelled by anger and emotion, rather than logic” – Win Investing
Revenge trading is also on the list of main psychological trading mistakes
These traders have been known to blow up their entire account and lose everything in a day or a week. Revenge traders are fuelled by anger and emotion, rather than logic. They will block out everything they know about trading and enter positions, often bad positions. The last throw of the dice may work a few times but if repeated the trader will eventually lose their money.
One solution to revenge trading is to reduce the potential size of your losses so you don’t get so upset when the trade goes against you. Trade smaller amounts. Also, be realistic about profit expectations. Try and put yourself in a psychologically good place before trading and take a break from it when you have the blues.
Gambler’s Fallacy is also on the list of psychological trading mistakes
Gambler’s Fallacy thinks a series of events will somehow affect the outcome of the next event. So when a trader is increasing the size of the bet because he/she believes their losing streak is about to end that trader has Gambler’s Fallacy. A string of losses doesn’t mean the next trade is going to be a winner.
The solution is to understand the problem and be aware of it.
So by being aware of these psychological trading mistakes you better on your way to making winning trades.