Trading psychology plays a very important role in a learning curve of a trader. In this post, we will discuss common biases and traps that every struggling trader is occasionally facing.
People rely too much on a reference point from the past when making a decision for the future - they are "anchored" to the past.
Imagine you spotted a great trading opportunity & made a nice profit. Encountering a similar setup in the future you trade it again. It turns out that you lose.
Next time - same thing. The setup that initially brought you nice cash refuses to work.
Even though the probabilities indicate that the identified pattern produces negative long-term returns, you keep taking that because you are "anchored" to the initial winner.
This is when people go to great lengths to avoid losses because the pain of loss is twice as the pleasure received from a win.
You see a great trading setup. You are 100% sure that it will play out. You open a trade and guess what? The market goes in the opposite direction. You can't believe that you are wrong. Instead, you decide to hold your position just a bit more adjusting your stop loss. And again, the market refuses to go in the direction that you projected. It is a vicious cycle that most of the time leads to substantial losses.
The confirmation trap is when traders seek out the information that validates their opinions and ignores any theory that invalidates them.
You spotted a great long opportunity on GBPUSD. Checking the ideas of other traders on TradingView you consider only the ones that confirm your predictions completely ignoring the opposite ones.
Many traders have lost large sums of money in the past simply because they have fallen prey to the mentality of overconfidence.
Imagine that you caught a winning streak. You feel like the king of the world. You spend less and less time and reflection on each consequent trading decision that you make, you lose your focus. At some moment the reality kicks in and your gains evaporate.
As a trader, you should execute your own analysis & avoid the temptation to blindly follow the majority.
Analyzing a EURUSD chart you make a conclusion that the market is bearish. However, then you see that 90% of the traders are very bullish on TradingView.
Instead of following your own analysis, you decide to join the herd.
These biases are common and most of the time we fall prey to them unconsciously.
The more you self-reflect, the more you analyze your thoughts and actions, it would be easier for you to avoid them.