It really doesn’t matter which aspect of life we are talking about, your trading mindset and mentality will define the outcome nonetheless. Similarly, we can have mental errors in the world of trading. Mistakes that can end your trading run altogether and totally ruin your capital once and for all.
This is why it is imperative that you are familiar with the most common mental errors that could occur while trading. In this way you can avoid such mistakes and protect your capital from being destroyed. So without further ado here is a list of the most common mental errors in trading.
Most Common Mental Errors for Traders
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Common mistake known as Gambler’s Fallacy
The gambler’s fallacy is one of the most common mental errors that many people make in the financial world and any market. According to the gambler’s fallacy, the market participant will think that the market is going to behave the same way that it had in the past.
In this way, market participants will only rely on past events and patterns in order to make predictions about future market movements. Of course, the future of any market is unknown and thinking that the past market patterns are going to define the outcome and price movements is nothing but a fallacy.
Therefore, as a trader who wants to avoid this mental error, you need to know that all financial markets are unpredictable by nature. Though it might be a good idea to get help from past patterns and past price movements, which is something that is done in technical analysis, you should always be ready for unpredictable behavior in the market.
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Not making decisions on your own
One of the common ways of trading in any financial market is known as copy trading or social trading. In this method of trading, the trader will solely rely on the strategy and trading approach of other traders in the market and will literally copy their style and strategy. But this should only be done in a controlled manner and based on highly professional and verified traders. There are platforms specifically designed for this purpose.
So make sure you do not rely on the information from other traders who do not have more expertise than you. Sometimes your friends or other people who are in your trading network might give you advice or techniques that should not be followed.
In order to avoid this mental error, you need to develop your confidence as a trader and not be swept away by FOMO.
You should read: What is the COT report and how can it be used in Forex market?
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Being too greedy
One of the most common mental mistakes that traders make is being too greedy. The feeling of greed will take you over when your position is in profit. So when the open position goes into profit, traders would normally become greedy and thus they want to keep their position open to obtain more profits.
The problem with becoming too greedy is that sometimes, in fact many times it is the exact opposite. This means your position will go into loss and you will even lose the accrued profits.
This is why it is highly important that you do not get too greedy and you are ready to pull out any time it is necessary.
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Being too fearful
The other side of greed is fear. So some traders instead of being greedy are fearful. This means they miss out on the chance to enter rather than the chance to exit. Therefore, when a trader is fearful, they will not see the chance to enter a position when the opportunity presents itself to them.
The way you can avoid this mental fallacy is by developing confidence but at the same time remaining cautious enough that you do not get greedy.
It is really a fine line between being fearful enough that it can be construed as cautious behavior and also not being too fearful that it would stop you from taking chances that would prove to be profitable and beneficial.
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Getting rich overnight
Another common mistake that traders make is that they want to get rich overnight through trading. But the fact of the matter is that trading takes patience and time in order to pay off.
Especially in markets such as the foreign exchange market. This is because in a market such as the forex market the profits are usually quite marginal and narrow. So this is why we have an approach to trading known as high frequency trading or HFT. Among the techniques and trading styles that have high frequency and are fast paced we can refer to scalping or even day trading. In these types of trading, positions are opened and closed quickly. Therefore, profits are quite narrow and marginal. So the hope is to accumulate small amounts of profits and let them grow and build up.
Patience is the key in trading. Being a trader is a hard and arduous journey that takes time and patience. As a trader you should always be learning and growing so that you can make a living out of this process.
You should read: The Concept of Market Sentiment and Its Importance in the Forex Market
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Too much dependence on techniques
Using different types of analysis, such as technical analysis which uses historical price data to make predictions about the future price movements or fundamental analysis which uses fundamental economic factors to analyze the market, is a great idea and in fact is highly encouraged. But you should still be careful about your dependence on these techniques and tools.
The ideal outcome would be for you to learn enough and grow yourself as a trader so that you can eventually just rely on yourself and your own talent and skill as the trader.
There are situations where the access to the tools that would ordinarily be used in that situation is just not possible. It is precisely in these situations that you need to be able to rely on your own skill instead and make the trading decisions based on your own intuition as a professional and expert trader.
You should read: Investment traps in the financial markets that you should watch out for!
Conclusion
The psychology of trading is an important part of the trading process. This is because the mentality and psyche of traders play an important role in the outcome of their decision making process. This is why it is important to know what the common mental errors are in the process of trading so that you can avoid them and protect your capital against such mistakes.
