9 Psychological trading mistakes and how to avoid them

BY Chris Andreou

|January 25, 2022

Being successful in forex trading isn’t limited to reading charts and setting up trades. There is a lot more to it than that; your success is affected by many different things and some of them just can’t be seen.

To make progress and get good at trading, you will need to identify the psychological trading mistakes that hinder you. With an open mind and a willingness to recognize them, you can avoid repeating the most common psychological trading mistakes traders make.

So, in this article, I want to focus on the most common mistakes traders make and ways you can avoid them. Some of them are easy to fix, while others will be a bit more challenging, but fixing them is a must.

We all make mistakes, and learning from them is how we grow. But when it comes to trading, mistakes can be costly. Every trader has experienced some or all of these trading mistakes at one point or another.

Keep reading to learn more about the psychological trading mistakes we make. I will also make some suggestions along the way that you can use to improve your trading psychology.

Let’s get in to it.

9 psychological trading mistakes

What is a psychological trading mistake?

Psychological trading mistakes are terms used to describe a number of different errors or pitfalls that traders can fall into. They are generally characterized by the fact that they are rooted in human behaviour and psychology, rather than something else.

For example, the most common psychological trading mistake is thinking of your trading as a by-product rather than a process. That comes from confusing the results with the process. When you make money, you tend to think you’re a good trader and when you lose money, you think you’re a bad trader.

That is absolutely not the case because you can follow the process correctly and still lose money due to the random nature of trading results.

The extent to which psychological trading mistakes can be avoided, or their impact reduced, depends on you. It begins by becoming aware of them and then taking steps to avoid repeating them in the future.

1. The impulse to over trade

There are two main psychological patterns that lead traders to over trade: impatience and over confidence.

Impatience leads traders to force trades based on their predictions about the future, not what is, in the present moment. If you want to buy because you think the asset will go up, go ahead. But if you are looking for any excuse to buy or sell, you are probably over trading.

An example of when this mind-set might prevail would be because you have bills to pay. Or you think that you should be making money from trading every day.

Over confidence is the tendency for traders to convince themselves that the market will turn around. Over confidence leads traders to misread the data available at any given time or think they know it all and assume that their information is better than it actually is.

You can only make an educated guess and then let the market do its thing. Be patient, remain humble.

2. Emotional trading

Another psychological trading mistake is decision making based on emotions. This is a major culprit for trading mistakes for a lot of people when trading. The problem with making decisions based on emotions is that it can cause us to make irrational ones.

It doesn’t start with trading; most people also make decisions based on emotion in their daily lives. Emotions are powerful and often irrational motivators of human behaviour. In fact, they’re so strong that they can cause us to act against our best interests and against what we believe to be true.

It may seem contradictory that emotions, which we typically think of as feelings, could cause us to act against our better judgment. But that’s exactly what happens whenever you trade and risk your money.

Trading based on emotion will consistently lead to the same unsatisfactory results. The way to avoid this is to create a trading plan and be process orientated. Plan your trade and trade your plan.

3. Confirmation bias and marrying the trade

Confirmation bias is when you start with a hypothesis, and then look for things that confirm it. As human beings, we naturally look for patterns in the world around us. We want to classify the world and put things into categories, then make predictions based on that.

But there can be a problem with this; it means that we often see patterns where they do not exist. Confirmation bias means that we tend to interpret new information as further confirmation of our existing views. When trading based on emotion, we even ignore information that contradicts our views too.

As traders, we need to be aware of our trading psychology. Then try to give equal weight to supporting and contradictory evidence about our trading ideas.

4. Trying to recover from losing trades quickly

Trying to recover your trading capital by making up for historical losses is another classic psychological trading mistake traders make.

If you lose money on any given trade, it is likely that you will feel some kind of regret or disappointment. That can affect your trading psychology, because you want that feeling to stop. The way to handle not making further trading mistakes is not to avoid this feeling, but rather to learn how to react appropriately.

You must focus on the present rather than the past when making your trading decisions. This implies that you should only evaluate a trade on its current merits, not on what you have previously done to incur the loss.

Usually, this psychological trading mistakes is just by being patient and delaying the gratification of recovery is all that is required.

5. Loss aversion or trading scared

Trying to avoid loss by trading scared or being overly cautious is another one of the most common problems that many traders face. When we fear taking losses, we avoid entering trades or move our stop losses to break even too quickly.

With the former, we want to seek more assurances that the trade will work before putting it on. We want to be right and try to seek out certainty in an environment that is inherently uncertain.

The problem with protecting your trade too soon is that you may be giving up some gains later on, just to avoid a loss. But since we have convinced ourselves that we are protecting our capital, it’s easy to justify the action.

Not that protecting our capital is a bad idea in trading, but doing that too soon can lead to longer term consequences. If you bail out every time the market moves against you, you are going to miss some of the biggest opportunities.

The best way to avoid losses isn’t to try not to lose; that is inevitable. It is to make sure that when you do lose, it won’t matter that much.

6. Unrealistic trading goals

Many of the psychological trading mistakes that traders make stem from some form of unrealistic or overly optimistic expectations.

There is nothing wrong with having high expectations and setting ambitious goals. However, you can expect to be met with some challenges and resistance along the way. Without being prepared for them or setting realistic expectations, chances are you are heading for disappointment.

The financial markets don’t provide as many opportunities to take low risk; high potential reward trades that often. You have to be patient and cherry pick the best trades. At other times, the trade just won’t work out, despite all the conditions that indicate that it should.

It’s all about keeping things in perspective and that usually involves balance. You can realistically expect some combination of fast small money or slow big money, with losses in between.

7. Limited real trading experience

Trading on a demo account can be a great tool to learn how to trade. But it’s not the same as trading with real money. Staying on a demo for too long is a psychological trading mistake. Demo accounts don’t prepare you for the emotional aspects of trading.

Furthermore, you can tend to develop overconfidence in your skills when practicing without risk. Trading with virtual funds which are larger than what you may intend to go live with also creates a false sense of reality. Demo accounts can lead to bad trading habits, including many of the psychological trading mistakes already mentioned above.

When you have nothing to lose, you can easily hold on to losing trades longer than you should. When you have a significant balance to absorb large draw downs, you want to hope the market turns around. When you have a large virtual balance and see the results of that, you might create unrealistic expectations.

Don’t stay on a demo account for too long, keep it realistic by trading amounts similar to what you intend to deposit. Don’t let it become a crutch to avoid taking any risks at all.

Move to a real account and start trading live from 10 cents per pip

8. Not holding yourself accountable

Trading is mainly a psychological game and if you can’t admit to yourself when you’re wrong, then you will never make progress as a trader. What you need to do is be honest with yourself about what you do and don’t know.

Blaming other people or your broker for your failure or losses is a great way to avoid taking responsibility for them. The more you blame others, the less control you have over your own destiny.

We are not consciously aware of this way of thinking; it is an automatic mental process. But it has a big impact on how we react to what happens to us, because whether we feel in control determines how happy we are. The happier we are, the more energy and optimism we have; and whether we take risks depends largely on how optimistic we feel about success.

The point here is that blaming others for your failures in trading robs you of control over your own destiny – which means robbing yourself of progress and success. Take responsibility, put in the effort and practice.

Read about the common traits of successful traders.

9. Revenge trading or the fear of missing out

Revenge trading happens when a trader feels he is about to miss out on a market move after being stopped out. Revenge trading is usually caused by fear of missing out and wanting to be right. This behaviour can be defined as a disproportionate reaction by traders to a single event in the market.

Revenge trading or the fear of missing out is a psychological problem that almost every trader suffers from at some point. It is normal for any trader to feel this way but it must be checked before it ruins your trading account. The desire for revenge on the market tends to occur after a large loss or series of losses, and is caused by an emotional response that overrides rational thought.

To control this and create better trading habits, write down your trading rules. Try to stick to them and if you do realize that you aren’t following the plan, get out of the market straight away. Hold yourself accountable for the rules you create and maybe step away from trading for some time.

How to avoid these common psychological trading mistakes

In a field that is so competitive and no matter what your level of experience, market ups and downs can take their toll on your emotions. Trading is an emotional process.

When the market goes against your position, you may become angry or frustrated. If you find yourself trying to rationalize why the market should have done a thing, stop! Acknowledge the emotion, remain calm and accept that you can’t control the market.

Confirmation bias leads us to seek out information that confirms our views or how we want things to be. Take greater care in analysing new information and consider the opposite view. One of the best things you can do is place your trade, including profit target and stop loss and perhaps walk away.

Be patient and let the trades develop, if they turn out to be a loss, then wait for the next opportunity. Don’t make the mistake of over trading and trying to recover from the losses immediately. Take stock of what happened instead of chasing losses.

The key to success in the markets is learning how to avoid making these common psychological trading mistakes. This is why having a trading plan is so important. Trading with a reputable broker that provides competitive trading conditions can also help.

Many traders make psychological mistakes that prevent them from reaching their full potential. By understanding these common mistakes and learning how to avoid them, you’ll be able to trade more confidently and effectively.

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Chris Andreou

Experienced independent trader

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