Guest Commentary: Five Trading Don’ts and What To Do about Them
Trading can be complicated to learn. Many traders spend hours every day on their charts, yet still find success elusive. Part of the difficulty can arise when little attention is paid to the mental side of the game. Developing a mental edge is just as important as possessing a technical trading edge. Here are five common mental ‘wrong steps’ that can quickly derail your trading. These can blindside you no matter how good your technical skills. This brief discussion regarding these trading don’ts offers an introduction to trading psychology and some sensible solutions:
What Not To Do
1. Have an opinion. One sure way to find yourself trading against the market is to have a market opinion. Trading with a rigid belief about what the market will do next can limit your ability to see what the market is actually telling you.
2. Have someone else’s opinion. Adopting some market guru’s market opinion is actually worse than having your own. Market gurus are notoriously inaccurate in their predictions. Embracing another’s market judgment prevents you from learning to read the market on your own. Besides, it’s doubtful the guru will be texting you to let you know when his or her opinion has changed.
3. Make your opinion public. Putting your bias into a chat room or forum thread makes it public. Making something public gives it a psychological life of its own. It’s hard to back off an opinion once you have announced it to others.
4. Let your ego get involved. Everyone wants to be right. In trading, learning to accept being wrong and the losses associated with being wrong is a big part of the game. This is no place for big egos.
5. Ride a loser. Still wanting to be right? Having a bias, making it public and getting your ego involved will cause you to hold losers far longer than you should.
What to Do
1. Anticipate. Avoid having an inflexible bias. Identify areas where the market might turn, break out, or continue and think through what that would look like. Anticipate the alternative ways the market may trade. When you see the market trading as anticipated, you already know what to do.
2. Keep your own counsel. Avoid gurus. Jesse Livermore viewed trading as a “lone-wolf” business, and it is. Learn to read the market and make your own decisions.
3. Avoid the forums while trading. Use the good ones as a source of education, but refrain from making your trades public.
4. Check your ego. Be aware of when you want to be right. Ask yourself, “What is more important, being right or making money?” Then, make the correct decision. 5. Cut losses short. Use hard stops and be merciless with losing trades. When the market turns against you, exit.
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You are invited to visit the author’s website and daily blog at: www.TradingPsychologyEdge.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.