That sounds dramatic but that’s trading for you – full of drama. Have you ever experienced making a decent profit, getting excited about it, losing it all again and spending a sleepless night?
If you have, you’d know what I’m talking about. It happened with me more than once and i know how it feels. It gives a sense of failure and you kick yourself for not being sensible. I suggest looking at your trading mistakes as a learning curve. I learned long ago that before entering into a trade, you set your profit objective and stick to it. But it’s easier said than done.
Let’s take a look into the mind of a trader who returns all the profits made. Understanding this will help you develop the right trading mindset.
The Recency Phenomenon
A win makes a trader happy and happiness releases endorphins, which in turn interact with the receptors in the brain and discard all pain and negativity. If we take this into consideration, it is easy to understand why a trader conveniently forgets all the previous losses and revels in newfound happiness that a profitable trade brings.
This is called the Recency Effect.
“The serial position effect is a psychological phenomenon associated with memory that says that items at the beginning (primacy) and items at the end (recency) of a list or string of information are more easily recalled than items in the middle.” ~ Study.com
Natural human tendency is to recall the latest trade results (recency effect) rather than those from the past (primary effect).
During this phase, we feel that we’ve figured the market out. We are overconfident, because we only remember the recent profitable trades. We make hasty decisions and this leads to losses.
Hubris/Overconfidence Is A Killer
Trading is very demanding and entails developing a high level of self control. I have seen some novice traders experience “beginner’s luck” by winning a few consecutive trades. They assume that the present returns are indicative of future returns, and believe that they are on the proverbial road to quick riches. This thinking is based on overconfidence in their ability to make profits. With raised expectations, they change their trading positions and frequency.
Unfortunately, they fail to understand that their success has more to do with the markets being favorable at the time of their trades. A majority of new traders experience this and fall prey to the markets, returning all their profits.
This causes disappointment and either a disinterest in trading or desperation to recover all the money they lost. Most traders fall into the second category and continue playing, to reverse the loss, and they end up losing more.
Developing The Trading Mindset
You can gain control over the Recency Effect and overconfidence by understanding the meaning of “probabilities” in trading.
A knowledgeable and disciplined trader, trades probabilities, not possibilities or certainties.
All trades are unique and one profitable trade does not translate into another. Controlling your mind and developing the right mindset is crucial to success in trading.
Here are some pointers to help you:
· In trading, no one knows the future and there are no certainties
· With experience, it is possible to understand probabilistic outcomes
· You cannot expect to win all the time
· Do not focus only on recent trades
· Always keep your trading plan in mind
· Learn to treat each trade as unique
· Learn to keep your profits
· Don’t try to recover lost money
Bringing Home The Bacon
Are you trading for money? I can hear a resounding “YES.” When you make a profit and all you have to show is numbers online, it means nothing. What use is money when you can’t use it?
Many people are also careless with online money, just because it is not real money in hand. If you lose a hundred dollars trading online, you may feel bad, but it doesn’t pinch as much as losing the same money in real world.
Money is a valuable commodity and seeing it in your bank account is important.
Withdraw Your Profits
It is important to withdraw at least some of your profits. Not just that; once that money reaches your account, don’t leave it there. Withdraw it and keep the cash in a glass bowl in front of you, where you can see it. I’m suggesting you do this to ensure you understand the meaning of profit. What you gain online in terms of profit is not virtual, it is real cash. Don’t lose it.
When you actually see the cash you earned in front of you, you will realize the mistakes you have been making. You will be more careful with your trading profits. You will learn to trade more responsibly. Successful traders understand the value of every dollar that comes their way. They withdraw some of their profits and also work on growing their trading capital.
The day you develop control over your mind, is the day you will stop gambling and start trading for profit. I have always taught my students to treat each trade as unique and respect the huge potential it offers. My goal is to help traders achieve what they set out to – trade and make a profit.