DEALING WITH TRADING MINDTRAPS
The emergence of trading in speculation has conceived a new breed of traders in the financial market, most of them are non-professionals attracted by the thought of gaining wealth quickly, partially due to the development of retail trading solutions available in the internet.
Because of the advent of technology, dealing with trading mindtraps become more difficult. And since traders are human, perfecting their trades may not exist. Many budding traders tend to easily fall into these mindtraps due to the development of retail trading solutions in the internet.
This article has compiled some of the most common trading mindtraps.
False Expectations Many novice traders, especially when trying a broker’s service using a free practice account, believe it is very easy to make money from trading. They always think this is an easy occupation and revenue can be quickly earned by doing little work. For them, one good pick is considered a market speculation, and that is their key to success and wealth.
But upon shifting from practice account to live account, traders won’t realize trading activity will become more complicated because they will risk real money. Days of outstanding day-trading performance come to look suddenly and distressingly like old souvenirs, an abrupt initiation into the pitiless reality of the financial markets.
Practice Trading Against Real Trading Leaping from practice account to live account is the most difficult phase to trading, which is called the trading psychology. For inexperienced traders, it is much easier to trade when no risk of loss is involved because they feel comfortable doing it even if the market moves against the positions they enter, of small consequence tied to virtual money, and it makes them focus more since personal emotion won’t interfere.
Once they have put the practice into live trading, their focus and price objective may be disregarded. Trading actions affect the gain or loss of the trader’s personal assets, and he is less likely to behave in a methodical way.
Emotions Ruling the Trade Viewed as the traders’ worst enemies, emotions often lead to misjudgment and loss. Such feelings generate mindtraps, as described by Roland Barach in his 1988 book Mindtraps: Unlocking the Key to Investment Success.
There are various range of emotions that can rule a trader. This article will cover the major ones.
Greed. Traders has the tendency to hold on to their positions, hoping for a higher price even if it declines. Greed is the culprit behind many trades that have gone from large gains to huge losses. To overcome this emotion, look at the reasoning behind positions. For example, when one of the positions suddenly increases, determine whether the reasons behind your initial investment remains or not. In case of the latter, perhaps that is the time to cut down or close the position.
Fear. If greed makes these traders hold on to a position for a higher price, fear prevents them from entering traders and makes them take their positions out too early. They are much concerned with potential loss and risks associated with the investment. Therefore, they are steered from locking in a good opportunity. If a trader is too sensitive with this emotion, he may close an investment way too early because he is too scared to lose the gain he has already made, preventing him from cashing in on a much greater gain.
Paralyze by Analyze. Traders are occupied with analyzing everything about a potential investment even its smallest details, but they never actually pull the trigger on their trade. Oftentimes, investors will constantly question all the details in the analysis. But attempting to perfectly analyze a certain situation is an impossible task. Paralyze by analyze will prevent a trader from making both monetary gains and experiential gains through trading.
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