It’s no secret that trading isn’t exactly easy. However, despite the role of all the factors that are outside of our control when we trade, research shows that the human mind may in fact be our greatest adversary in the markets. To understand why people fail at trading, we therefore need to study how our own minds work.
To help you understand and overcome how your mind affects your trading, here are four psychological reason traders why fail and how you can overcome them:
Traders often make the mistake of thinking that an abundance of information means that the information must be correct. This is not necessarily the case. Despite how much data you have, chances are it’s not going change the result of a situation.
Traders often suffer information bias, especially in cases where they incur losses and end up with the regret that some more information may have tipped the outcome in their favour.
As a result, traders invest in books, webinars, and join various online discussion forums that they hope may increase their chances next time.
However, instead of spending days and weeks on loading your brain with more information, a far better way to overcome the information bias is simply learning how to trade through practical experience such as the live trading coaching offered by Learn to Trade.
The outcome bias occurs in a situation where a trader judges a decision based on what happened instead of how it happened. Suppose you made a risky and senseless trading decision that, simply due to luck, worked out in your favour. However, just because the outcome was positive, doesn’t mean the process was.
The outcome basis is problematic for traders because it results in incorrect assumptions on how they should trade. People often abandon their trading plans that took the experience to prepare in favour of a decision that is pure guess work. Hence, it’s vital not to move away from your trading plan, and focus on the decision process, rather than purely on the outcome of the trade.
Most people are aware of what a bandwagon effect is. In case you aren’t, it merely explains how one bases own beliefs depending on other people’s opinion. For instance, if many traders hold an incorrect belief or assumption, then other people would accept it too, only because the former is in the majority.
Such situations are more likely to arise when you’re a member of a trading group or forum where you share trading ideas and strategies with others. While it’s always helpful to be a part of such groups, it’s also important to not always believe what everyone else thinks.
The lesson is therefore to learn to think for yourself, and be willing to stand up for it even when people disagree with you.
While it definitely helps when traders have faith in themselves, too much confidence can lead to more significant and unreasonable risks. Overconfidence can make traders see profits where they are unlikely and push them to make rash decisions.
Overconfidence also often leads to analysing data in a biased manner that supports your own views, and without considering factual information that goes against your assumptions. While it’s definitely good to not constantly doubt yourself, it’s also good to be open to learning.
As you have now seen, it’s essential to be able to succeed as a trader that you are aware of how your brain operates, while not letting your personal biases come in the way of decision-making.
If you think you have what it takes to become a profitable independent forex trader, and you want to learn more, why not join one of our free forex trading workshops in Sydney? Click here to find out where our next workshop is held and sign up today!