Trading Mind Traps, Avoid Them at Your Peril 

The availability of easy online trading platforms has resulted in a surge of new traders in the market — most of which are non-professional speculative traders who are attracted by the potential for fast income.

Have you personally experienced any one of the following mind traps one time or another?

I know I have…

False expectations

A common belief among novice traders is that earning money in the market is easy, particularly when they are using a free practice account.

Beginner traders who manage to earn substantial returns early on, might convince themselves that trading is an easy occupation with the promise of high income potential. Inexperienced traders who make one or two lucky picks might believe that market speculation is the key to instant success and wealth.

When they start using live accounts and risking real money, inexperienced traders quickly learn that the market is much more complex than they initially believed. After a short time in the trading arena, these traders experience the harsh reality of the financial markets.

Real Life vs. Practice

After spending some time with their virtual trading accounts, traders make the leap into trading with real money. At this point, they enter into the psychology of trading which is the most difficult part of dealing with the financial markets.

When traders use virtual accounts, they often feel at ease with their trading practices even when the market moves against their positions. This is because the risk of losing real money does not exist. However, when they start trading with real money, it’s common to lose perspective and their focus and price objective tends to dissolve. Emotion isn’t a factor when traders use virtual money. But when a trader’s personal assets are involved, the trader’s emotions can be a distraction from rational and methodical trading.

Emotions can rule the trade

When your actual monetary assets are on the line, your emotions can become your worst enemy. They can overcome your rational trading methods and result in poor judgment and losses.

In his book, Mindtraps, Roland Barach provides 88 lessons that explain the emotional pitfalls (greed, fear) that inhibit a trader’s ability to effectively trade in the market.

Greed

When a trader is winning on a particular trade, they hold on to a position too long (even as it falls) hoping that the price will go higher. Greed has often been the impetus for turning large gains into large losses. One way to combat this emotion is to look at the reasoning behind your positions. If one position experiences a significant increase, determine whether the reasons behind your initial investment are still the same. If they have changed, it might be a good time for you to make a change by either closing or reducing your position. 

Fear

Fear is another emotion that can undermine a trader’s success. It can compel them to refrain from entering a trade. It can also cause a trader to pull out of a position too early. The fear emotion is tied to the concern for risks and potential losses. Unfortunately, this fear might dissuade a trader from entering into profitable opportunity. Traders who are susceptible to fear, might be overly cautious and sell out of an investment too early and prevent them from winning a bigger gain.

Analysis paralysis

Some traders spend time analyzing every aspect of a potential investment, but never actually enter the trade. Thoroughly analyzing every detail about a trade is impossible so it is impractical to try. Attempting this level of analysis prevents traders from making both monetary and exponential gains because they never got into the trade.

Greed and fear are only two of the wide range of emotions that can inhibit a trader’s success in the market. As a trader at any skill level, it is important to acknowledge these emotions and strive to overcome them. Otherwise, your trading experiences will be full of discouragement.

Acknowledging emotions

No matter how skilled an individual is at trading, at some point all traders will experience at least one mindtrap. Good traders are those who acknowledge their emotions and learn to neutralize them. Before you enter into the trading arena, spend some time getting to know yourself, your personal characteristics, and the potential mindtraps that you might succumb to. A good trader takes the time to master his or her emotions and prevent them from hindering his or her ability to perform well in the market.

Trading nirvana

No trader is perfect. However, a good trader can succeed in the market by learning how to manage their emotions. Everyone has a different level of skill when it comes to trading so mastering emotions will be more difficult for some than it is for others. As with every other skill, traders learn to master their emotions by spending time and gaining experience in the market.

 

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