Downfalls in Trading Psychology
by Amanda Harvey
How Downfalls in Trading Psychology Threaten Success
Downfalls in trading psychology can be an insidious trap. No matter how much knowledge and strategy a trader has at their command, failing to be aware of the powerful influence the mind has over human behavior can make the difference between success and failure.
In the article, ”Psychology in Trading”,
some of the key components of a successful mindset were discussed, and
two of the emotions most frequently leading to a detrimental trading
perspective, namely fear and greed, were also mentioned.
This article covers, in greater detail, a range of downfalls in trading
psychology that can jeopardize a trader’s chances of success.
The Danger of Adrenaline
One of trading psychology’s deadliest potential downfalls in is in fact,
a biological factor. The adrenaline that is experienced along with the
excitement of trading can encourage a trader to ignore good sense and
planning, and to pursue the thrill of the chase or the win. It is
interesting to note that a near-win can produce even greater feelings of
adrenaline than an actual win, and can also create a powerful urge to
keep trying. While this desire to move forward, whether in the wake of
success or near-success, is certainly not a bad thing, it is vital to
make decisions from a clear-headed and rational frame of mind, and not
an adrenaline-fueled state.
Harmful Attitudes
Among the downfalls in trading psychology we can pinpoint personality
traits such as stubbornness and overconfidence. Whether these
characteristics are innate, or are experienced as a result of
circumstances, they are potentially detrimental to a successful trading
career. Stubbornness may show itself in an unwillingness to accept
‘defeat,’ and a determination to be right at all costs; however, the
trouble is that these costs are usually very high and still do not
produce the win against the odds that is desired.
Overconfidence often manifests following a period of success, when a
trader can be lulled into thinking that they have the ‘Midas Touch,’ and
that nothing they do can go wrong. This overconfidence results in the
relaxing of planning, strategy and risk management, and a foray into deadly trading territory. Furthermore, a trader who is prone to this type of emotional trading behavior may then revert to the opposite extreme, after their fingers have been burned, and become overcautious.
Over-caution is also one of the downfalls in trading psychology, as
there must be sensible, calculated, and moderate risk taken in order to
profit in the markets.
Detrimental Behaviors
Other downfalls in trading psychology result from behaviors that may be engaged in by traders.
One such behavior is blame. Rather than taking responsibility for their
own part in a losing trade, and endeavoring to understand the factors
that contributed to the loss, as well as accepting that some losses are a
guaranteed part of trading, some traders prefer to blame the economy,
poor advice, technology, or even karma or the stars. Aside from the fact
that practicing blame never does anything to redress a loss, it robs
the trader of the chance to learn from the experience, and to plan even
better next time.
Another detrimental behavior that may be exhibited in trading is denial.
This basically means ignoring reality and trying to convince oneself
that things are not really as they seem. Traders convince themselves
that the reversal which is occurring is just a blip or a retracement, and thereby hold back from taking logical actions of damage control.
Practicing herd mentality, or following what the crowd is doing, is a
behavior that not only keeps a trader behind the game, but may also lead
them up some undesirable paths. While it is wise to be aware of trends,
and market sentiment,
waiting on the sidelines for the masses to let you know what to do is a
very disempowering behavior and has no place in a winning mindset.
In Conclusion
Understanding the potential downfalls in trading psychology, and
learning how to avoid them is an invaluable part of creating a winning
trading mindset, and a road to trading success.
Options traders are not successful because they win.
Options traders win because they are successful.
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