Lesson 3: Two Mistakes That Will Destroy Your Trading Account
Lesson 3: Two Mistakes That Will Destroy Your Trading Account
In our last lesson we looked at how social influences can warp a trader’s view on what success and failure actually are when it comes to their trading psychology and ability to accept losses. In today’s lesson we are going to look at some of the most common mistakes that even the smartest people make when entering into trading as a result of humans ingrained need to be right.
One of the most common mistakes is sticking in a trade where you know your forex trading strategy is correct, but the market continues to move against you. As the famous economist John Maynard Keynes once said:
“The markets can remain irrational longer than you can remain solvent”
Perhaps one of the best examples of this are those who shorted the NASDAQ into the run up in 1999 and early 2000. At the time it was pretty obvious that from a value standpoint NASDAQ stocks were way overvalued and that people’s expectations for growth that they were buying on were way out of line with reality. There were many great traders at the time who recognized this and began shorting the NASDAQ starting in late 99. As you can see from the below chart and the huge sell off that ensued after the peak in 2000, these traders were right in their analysis. Unfortunately for many of them however stocks continued to run up dramatically from already overvalued points in late 99 wiping out many of these traders who would eventually be proved correct.
So as we learned about in last lesson, people’s strong desire to be right will often times keep them in trades that they should have moved on from even though the market may eventually prove them correct.
For those traders who are able to initially move on from trades where they feel they are correct but the market moves against them, another common theme which arises is for a trader to initially stick to his forex trading strategy, but after being proved correct and missing out on gains he becomes frustrated and deviates from his plan so that he will not miss out on another profitable opportunity.
One place of many where I have seen this time and time again is when watching traders who trade reversals at support or resistance levels. Many times when the market touches a support or resistance level it will have a brief spike upwards or downwards which hits the stops of a trader looking to profit from the reversal, taking him out of the market just as it turns in his favor. Because many traders think a like, often times the level at which the trader is taken out of the market is right at his stop level as well.
After this happens once or twice to a trader he will then stop placing hard stops in the market and instead convince himself that he will manage the trade if it moves against him. This may work a few times for the trader giving him more confidence in the trading strategy until the market does finally break. As we have learned about in previous lessons often times when the market breaks significant support or resistance levels it will break violently to the point where the trader in the above situation is quickly down a large amount on his trade. Typically what will happen at this point is instead of taking the big loss, learning his lesson, and moving on the trader will remain in the position or worse add to it with the hopes that the market will turn back in his favor. If the trader gets lucky and the market does turn back in his favor this only goes to support this bad habit which will eventually knock him out of the market.
Successful traders realize that situations such as the above occur constantly in the market and that one of the main things that separates successful traders from unsuccessful ones is their ability to accept this, stick to their strategy, accept that loosing trades are a part of trading, and move onto the next trade when the market does not move in their favor.
That’s our lesson for today. In our next lesson we are going to look at another major part of trading psychology which is related to not wanting to take losses which is people’s desire to follow the crowd.
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Sun 10 Mar 2019 AA CA/US- Clocks Move forward one Hour Mon 11 Mar 2019 AA 13:30 US- Retail Sales Tue 12 Mar 2019 AA 09:30 UK- Trade/Output AA 13:30 US- CPI Wed 13 Mar 2019 A 13:30 US- Durable Goods A 13:30 US- PPI A 16:00 US- EIA Crude Thu 14 Mar 2019 A 13:30 US- Weekly Jobless Fri 15 Mar 2019 AA 03:00 JP- BOJ Decision A 14:15 US- Industrial Production A 15:00 US- Flash Univ of Michigan
Mon 18 Mar 2019
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Tue 19 Mar 2019 AA 09:30 UK- Employment A 12:30 US- House Starts/Permits Wed 20 Mar 2019 AA 09:30 UK- CPI A 16:00 US- EIA Crude AA 18:00 US- Fed Decision Thu 21 Mar 2019 A 01:30 AU- Employment A 07:30 US- SNB Decision AA 09:30 UK- Retail Sales AA 12:00 UK- BOE Decision A 12:30 US- Weekly Jobless Fri 22 Mar 2019
Flash PMIs all day AA 12:30 CA- Retail Sales/CPI
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