To become a professional trader, you need to master a couple of things that will enable you to be successful and profitable. Knowing the market and having great technical analysis skills will not make you profitable if you can’t keep your emotions under control.
So how do professional traders trade without their emotions overrunning them? They stick to a couple of rules that they always use when getting into a trade. These rules can vary for each person.
To know which rules fit you, you have to know what kind of mistakes you make. We will list a couple of psychological trading mistakes down below and what you can do to tackle them.
So what does FOMO stand for? FOMO is an acronym for Fear Of Missing Out. The FOMO trader is basically always optimistic about each and every trade. Which makes him believe that every trade will go in his favor without knowing what they can potentially lose. The thoughts that occur by these kinds of traders are “This could be the one!” or “This HAS to be the one” or the “I can’t miss out!”. FOMO traders believe that if they miss this trade, that there won’t be another opportunity to get what they want.
FOMO trading can cause you to do two things. First, you will take every trade you see even though it isn’t a high potential trade setup, which will cause you into losing more and more trades. Secondly, you will increase your position size on a particular trade because you’re sure that this trade is the one, even though it could well be not and if the trade turns out to be a huge loss, it will be highly difficult to regain your lost capital.
So what do you need to change if you experience FOMO? Well, where does your FOMO come from? You see others winning in public chat rooms and on social media with insane profits, and you want to have those wins too. Keep in mind, that on the majority of the social media pages, only the profitable trades are shown. After you get rid of the chat rooms and social media, trade alone for a bit and train yourself to not look at others which indulges FOMO. And what if you can’t find any trades by yourself and only rely on public chat rooms and social media? It would be time to educate yourself more with a trading course (we have a free course) and learn from the best.
These are the type of traders which can blow up their entire trading account and lose their whole capital in just a day or a week. These traders are driven by madness and throw everything they know about proper position sizing out of the window to make their recent loss back. This may work once or twice, but if you keep doing this, you’ll get crushed badly and blow your account before you know it. The market doesn’t care about you, which means it won’t give you your money back. You are 100% responsible for the trades you make, so be careful with your funds. If you’re this type of trader and you struggle with this problem, you need to be honest with yourself and get a grip on this before you lose your entire trading account.
The solution for revenge trading is rather fairly simple. Trade smaller position sizes. This makes you “care” less about the trade. Your losses aren’t that big anymore, and so are your wins. Which makes you trade more on logic rather than emotion. Your main focus should be great position sizing and calculating your best risk to reward ratio. If you're still having issues with this and you know your position sizing is in check, then maybe it’s your mindset or your expectations of trading that is the issue. You need to make sure you’re committing and focusing on the long term. Which is growing your account, and not making it all back after that one loss.
This might not be a mistake but rather a misunderstanding of some basic probabilities which will then cause you to make very poor trading decisions which have the chance to compound and can cause very big losses. As you can guess by the name, it’s most commonly associated with gamblers. We certainly don’t want to treat trading as gambling.
So what is a gambler's fallacy? We all know that a coin flip is a 50/50 bet. So if you flip the coin 10 times, the expected outcome would be 5 heads and 5 tails. But we know that the actual number of heads and tails can deviate in either direction. To understand this more, let’s say if you flip the coin 10 times. The first 5 times will all be heads. Remember that the coin flip is a 50/50 bet. So if the first 5 are all heads, the 6 coin flip should be tails, right? Wrong. If this went through your mind, then you have fallen to the gambler's fallacy. The expected outcome of ten coin flips is of course five heads and five tails, as said here before. But rolling 5 heads in a row does not change the probability of the 6 coin flip. This coin flip will always be independent of past results. So the answer to what the 6 coin flip will be is still 50/50.
Gambler's fallacy refers to the thinking that a series of events will somehow determine the outcome of the next event. As if there is some balancing force at work. In this case, we explained how gambler's fallacy works on a coin flip. But this also applies to trading. What would your thoughts be after losing 5 trades in a row? That your 6th trade would be a profitable one and that your losing streak HAS to end soon. Some traders will then increase their position size because they feel their luck has to turn around any time soon. But the harsh reality is that you’re just increasing your risk on a trade that has the same probability of success of all the ones you just lost money on. The market does not know nor care if your last few trades were losers or winners.
The solution to this problem is easy. Understanding what gambler’s fallacy is and exercise your awareness. Train your mind to not be affected by this type of thinking. Try and treat each trade independently of any past trades you make.
Trading is a numbers game. So focus on eliminating these psychological trading mistakes and focus on the numbers. Once you can do that, and get rid of these mistakes, you can get your trading to the next level. The market is not a place for weak and emotional people, so make sure to control your emotions before leveling up your trading game.