There are 3 common trading mistakes made over and over.
This is mainly due to the psychology of trading and how humans react to certain situations.
The fear of missing out
Traders see a potential trade and simply must get in on the act. This is the fear of missing out. You see a price tumble and think that you have to join in.
The consequence of doing this can often be catastrophic with trades lurching out of control as markets turn and you are left with heavy losses. Worse still is if you get into a negative position and then try to rectify it with ever increasing stakes.
Solution: Accept that some great trades might be slip through your fingers. You should decide on the trading strategy you are going to employ, do your homework and action. Don’t follow the crowd unless this is a conscious part of your trading strategy.
Your having a bad day and things have gone against you. DON’T up the ante and look to make back your losses. Accept that some days will be loss making. Every day cannot make a profit and I for one have never seen a trader who made a profit every single day.
Solution: If you are making losses either keep trading as if you were at evens or even ahead ie do nothing different OR if you have the urge to do something completely out of your strategy in order to make back your losses then TAKE A BREAK – whether that be for 10 minutes or pack in for the day.
Gambler’s Fallacy is the thought that an event with a known probability can become more or less likely dependent on what has happened in a previous series of events.
Let’s take tossing a coin. A fair coin has a 50/50 chance of being heads or tails.
So if I am going to toss a coin 10 times and the first 5 tosses come up HEADS what is the likelihood of the next toss being a head. SOME people reckon that it has come up heads enough and the next toss therefore is more likely to be a TAIL? NO the probability of a head or a tail is exactly the same on the sixth toss as it was on the first – 50/50.
Solution: Be aware that this is a trick of the brain and that you should treat each event as an independently and keep emotion out of your trading.
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