We all know that learning anything new can be challenging, but it is even harder when learning is costing you money! Many times, this is doesn’t to what they know (or what they don’t know), but learning how to master the mind. Without the right trader mindset, as a trader you won’t be successful no matter what you know. So, we’re sharing the 4 common mindset mistakes beginner traders make to help you avoid them!
What do you pick?
You have a chance to win a prize:
- A – Guaranteed £5,000, or
- B – A 50/50 chance of winning £0 or £12,000?
- A – A certain £5,000 fine, or
- B – A 50/50 chance of the fine being either £0 or £8,000?
If like most people, you picked the sure thing on the win… and the gamble on the loss then it is a sign that you’re not as rational as you think. Even with the odds stacked in your factor with upside, it is hard to not choose these options.
And compound that with nothing is guaranteed in trading.
The Undoing Project by Michael Lewis (covers the start of behavioural economics from two revolutionary psychologists Amos Tversky and Daniel Kahneman).
They identified two groundbreaking things that impact how people relate to money and have a HUGE impact on how people trade.
What this means is that:
- Open profitable trades are closed too early (for fear of loss of profit)
- Losing trades are left open too long (for hope of recovery)
Profitable trades are often closed too early – whereas losing traders are left open for too long.
Here are some of the common dysfunctional psychology that affects traders and how you can avoid them.
1. Closing profitable trades too early
Have you ever wondered whether you should take the profit or let the trade run in the middle of a trade? Or even closed trade with a small loss before the stop loss has been hit.
Maybe you take the profit and proved to be a better decision? And other times you smacked your head since you’ve closed too early?
Why do you do it anyway?
Well, here are your answers…
First, you don’t have a clear profit target in mind
It’s always important as a trader to have a plan. You need a plan to determine when to enter a trade and when to exit. You need to have a clear profit target and have a goal when trading.
Second is low-risk tolerance
This might sound reasonable but it’s a fatal mistake many beginners make. If you want to make profit trading you must be ready to take calculated risks.
There’s no short cut!
Enter a trade with an expectation of making a profit and be patient. If your goal and strategy are to close with £150 don’t close with £100 because you are afraid to risk the unrealised profit for another £50. This mindset mistake is often made by beginner traders as without patience, fear of loss takes over.
Last is lack of confidence with your trading skills and idea
To have the ability and strength to hold your trade until it hits your profit target does not only take patience but a great amount of confidence.
You’ll find a lot of uncertainties along the way which will make your confidence even more challenged. It will be more tempting to lock the wins rather than risk the possibilities of losing them by keeping the trade running.
But remember, mentally missed opportunities will hold you back more than the potential loss of the unrealised profits. Mindset is key to avoiding this in new traders, having belief and confidence usually comes over time.
Therefore, you need to trust yourself and your strategy to be able to hold your trades until they reach the planned profit target (of stop loss).
2. Gambling’ on losses open
One of the biggest lessons, you should learn as a trader is to accept defeat. Even though everyone’s goals when trading is to make a profit, losses are a normal part of the overall trading process!
I get it, who loves losing?
If it’s tough losing where there’s nothing at stake, what more when actual money is involved?
Imagine yourself in this situation.
You see a market setup that you are so sure it’s a win. Then you enter the trade but due to some reason, it goes the other way.
Now you are losing but you are confident that it will soon turn and to go your way.
You don’t want to be stopped out so you extend the stop loss! You are losing more. But you can’t exit now, what if it turns back?
So, you tell yourself to wait and hope it will turn and at least break even before you to exit.
But wait a minute! The loss is too much, you think it’s probably a good idea for you to exit. But it’s late now and you’ve probably drained half of your account!
Have you ever been here?
Just like in real life and relationships, losses are often very painful.
The truth is, losses are painful, and most of the time we are tricked to stay in the toxic relationship to avoid the pain of leaving the market and accepting the loss.
Usually, the situation only gets worse and the likelihood of draining your account gets even higher.
Even if you pull this and the trade turns around to your advantage, chances are that you will try it again and this time it’ll be too late to salvage.
The best way to handle the situation is to set a fixed risk limit. Once the price hits the stop loss, exit the trade.
Make your trading mindset aware of the common beginner trader mistakes so you can avoid them.
3. Focusing on just the good trades
As easy as it may sound, this is something that has affected many traders and even resulted in them quitting.
Obviously, that the market is full of uncertainties and if you are looking for reasons to fail you will find many.
By focusing on the fails, you will create fear which will stop you from entering even the perfect trades.
Conversely, if you believe you will succeed you will notice the good trades more, as the positive will stand out to you.
Here is what I mean…
Have you ever been pregnant or wanted to be and then all of a sudden you see so many pregnant ladies?
Where did they come from?
There is the same amount of pregnant ladies but they just stand out to you now that is what you want to or are experiencing yourself.
Be balanced. Don’t be blinded by just good trades.
The same thing applies to trading.
If you focus on the good trades you will notice the good trades.
That’s why you need to focus on the trades that are likely to succeed!
Related Reading: How a Trading Journal Helped Me Double My Profits
One way to avoid this is by getting a trading journal. It forces you to review all trades and learn from what isn’t working.
4. Learning from trading mistakes
Trading success is a journey and wise traders learn from their mistakes. Input changes into your trading routine and systems to improve your performance. And don’t be fearful of mistakes you make, they help you to improve.
In fact, being wrong can make you money… (in the long run)
When you make a mistake you learn quickly because they hurt and they are hard to forget. This is one of the benefits for learning with real money, but a small controlled pot. You don’t get the traders emotional and mindset practice when trading a demo account.
You can help with the fear of putting on a trade by mentally practice trade outcomes and how you can correctly react. This will stop knee jerk or panic reactions. Every bad habit you realise you have can be removed by mentally rehearsing and removing them. By controlling your mindset you’ll limit the mistakes that beginner traders often make. Good luck!