Being a forex trader seems easy enough for most people as long as you have the right tools and knowledge to use. However, to be a successful trader, you have to learn more than just tools, strategies, and indicators. A large part of successful trading comes from mastering your mind and your thoughts.
Here we will talk about the 3 most common psychological mistakes traders make and how it affects their trades.
FEAR OF MISSING OUT (F.O.M.O)
The FOMO trader is typically optimistic in every trade. This trader thinks that he won’t get an opportunity as good as what he is currently looking at if he misses this particular trade. Successful traders can agree that this kind of thinking puts many traders in high-risk positions, and they know that there are tons of other opportunities in the market.
Although this seems too obvious, the reality is that this mentality affects so many traders, mainly because they don’t realize it’s affecting them. This is a massive problem because it can cause the trader to do 2 things.
- It can cause you to take every single trade you see even if it’s not a good setup or has not done any proper market analysis.
- It can cause you to oversize your positions because you think that it’s so good that you would want to lock in bigger profits. This completely blows off your risk management and might blow out your entire account in just a few days.
Most traders don’t understand that missing out is a part of the game, and that happens, and they know that many other better opportunities have a higher probability.
These are the type of traders that can lose their entire account in just a day or a week. After taking a trading loss, revenge traders will throw out everything they know about proper position sizing and risk management and then trade as much as they can to make back that loss. This may work once or twice, but if you keep this up, you will have many more losses than you can manage. This will not only affect your bank account, but it will also affect you psychologically.
The market does not care about your money or your feelings. That’s the reality. You are 100% responsible for anything that happens to your account. If you are currently upset enough for your losses and thinking of revenge trading, it would be much better to trade in smaller sizes and re-evaluate your risk management. This will allow you not to get upset with those losses, and you’ll be able to start making decisions based on logic rather than emotions.
This might not be a psychological mistake but rather more than a misunderstanding of basic probabilities, which will cause you to make abysmal trading decisions and, in most cases, this can compound to massive losses.
As far as the name is concerned, you can probably guess that this is commonly associated with gamblers. We certainly don’t want to treat trading like gambling. Gambler’s Fallacy is thinking that a series of events will somehow affect the next event’s outcome.
In trading, so many trader’s fall under the influence of this fallacy. If a trader had a 5 losing trades in a row, it does not mean that the 6th trade or the next trade will be win just because the trader feels that the losing streak is coming to an end. Many traders tend to increase their position sizes after a losing streak because they think their luck will turn around soon. The reality is, they are just increasing the risk of their trades with only the same probability of success of all the ones that they just lost money on.
The market does not know or care if your last trade is a win or lose. Now that you understand what gambler’s fallacy is, try to treat each trade independently from any past trade that you made regardless of the previous results. If you had a streak of losers, that does not mean that your next trade will be a winner, and just like on the streaks of winners, it also does not mean that your next trade is a loser.
Forex trading is a number game. Having the right knowledge, tools, and self-discipline is vital to be a successful trader.
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