When I’m facing tough periods of trading (like this one), my initial reaction is to go back to my charts and try to figure out what I’m doing wrong technically.
However, as I’ve been going through my losing trades from the past several weeks, I’ve realized that a big factor in my recent string of losses has been something else entirely…
My trading psychology.
You see, if your mindset isn’t in the right place, all the technical analysis in the world will do you no good.
With that in mind, today I’d like to go over eight common psychological hurdles that every trader faces (and how to potentially overcome them).
Keep reading and I’ll show you…
The Fear of Losing
Fearing losses (or missed opportunities) can lead to execution hesitancy, missed trades, or premature exits.
And any one of these mistakes can hinder your decision-making and profitability.
Bottom Line: If you’re trading scared, you’re setting yourself up for failure.
The fear of losing is a common problem. To overcome it, you’ll need to change your trading mindset.
To avoid trading scared, do the following:
- Plan your trades carefully
- Don’t oversize your positions
- Set stop losses above your maximum loss tolerance
Greed and Overtrading
Greed can drive traders to take excessive risks or engage in impulsive trading, leading to poor risk management and potentially disastrous losses.
On the same token, overtrading can potentially lead to some of the worst trades in your career, as it can be mentally taxing and cloud your judgment.
While wanting to grow your account in a fast-paced market is natural, it’s important to remember that ‘slow and steady wins the race.’
REMEMBER: Your trading journey is a marathon, not a sprint.
Whatever you do, don’t overtrade!
Marrying a Position
Sometimes, traders can become emotionally attached to a position.
In other words, they get married to an options trade.
No matter what the fundamentals and technicals are telling them, they won’t sway from their initial trade thesis.
This can cause traders to ‘hold and hope’ onto a loser in hopes of a miracle reversal … when they should be cutting the loss immediately!
Treat every trade similarly. Trade your strategy. Don’t get married to any one play.
Overconfidence and Confirmation Bias
There’s a fine line between confidence and overconfidence.
The former is a virtue every Evolver should strive for, while the latter can lead traders to take on excessive risk or trade with blinders on, ignoring key technical indicators.
Similarly, confirmation bias can make you seek information that confirms your initial idea and ignore signals to the contrary.
My advice? Don’t drink your own Kool-Aid…
Always be questioning your initial convictions, ready to flip the script when the price action calls for it.
Regret and Revenge Trading
I recently wrote about the psychology of regret, a feeling I’ve been experiencing a lot recently…
I stressed that while it hurts to regret a loss, there can be benefits to the feeling as well.
Regret can inspire you to improve. You can weaponize negative emotions to your advantage.
But there can be a dark side to trader regret as well…
Regret can drive traders to seek revenge by taking impulsive trades to recoup losses, leading to further losses.
So, use regret as a catalyst for growth … not a reason to revenge trade subpar setups!
As a technical trader, I spend a lot of time marking up charts and identifying technical indicators.
However, it’s easy to go overboard on analyzing the stock market…
Excessive technical analysis can result in overthinking, delayed decision-making, or even missed trading opportunities.
I recommend doing your technical analysis outside of active trading hours.
That way, you can focus on identifying the most important indicators without the distraction of the market moving.
“It’s so obvious in hindsight!”
Have you ever uttered these words about a trade?
If the answer is yes, you’ve experienced hindsight bias — the belief that outcomes were more predictable in hindsight.
But if you rewind the clock back to the information you had when you put the trade on, you’ll find that the outcome wasn’t obvious.
If it had been, you would’ve traded differently. Don’t let hindsight bias stop you from improving.
Instead of blaming hindsight, ask yourself … why did I put the wrong trade on? And how can I avoid making similar errors in the future?
We’re all human…
At some point, after long periods of intense stress and hard work, we get burnt out.
This isn’t unique to the stock market. Working any job consistently at a high level can lead to burnout.
There’s nothing wrong this. Don’t beat yourself up. Rather, consider taking a break.
If you wanna know how to step away from the market productively during periods of burnout, click here.
In the age of Twitter, Reddit, and StockTwits … herd mentality can be a serious obstacle for traders.
It can be difficult to sort ‘signal’ (valuable information) from ‘noise’ (meaningless chatter) when scanning online message boards.
Even worse, some traders simply look to others online for ideas, then copy their plays.
Team trading can be helpful at times, but ultimately, every decision should be your own.
To truly succeed in the long term, you can’t rely on other trader’s intuition.
You must harness your own individual skill to your advantage.
I bet you’ll experience all of these psychological hurdles at one point or another in your trading career.
But, when you do, don’t freeze up and let the market beat you…
Instead, reference this letter to help overcome these mental barriers to true trading mastery.