In our last lesson we looked at how social influences can warp a trader’s view on what success and failure actually are when it comes to their trading psychology and ability to accept losses. In today’s lesson we are going to look at some of the most common mistakes that even the smartest people make when entering into trading as a result of humans ingrained need to be right.

One of the most common mistakes is sticking in a trade where you know your forex trading strategy is correct, but the market continues to move against you. As the famous economist John Maynard Keynes once said:

“The markets can remain irrational longer than you can remain solvent”

Perhaps one of the best examples of this are those who shorted the NASDAQ into the run up in 1999 and early 2000. At the time it was pretty obvious that from a value standpoint NASDAQ stocks were way overvalued and that people’s expectations for growth that they were buying on were way out of line with reality. There were many great traders at the time who recognized this and began shorting the NASDAQ starting in late 99. As you can see from the below chart and the huge sell off that ensued after the peak in 2000, these traders were right in their analysis. Unfortunately for many of them however stocks continued to run up dramatically from already overvalued points in late 99 wiping out many of these traders who would eventually be proved correct.

So as we learned about in last lesson, people’s strong desire to be right will often times keep them in trades that they should have moved on from even though the market may eventually prove them correct.

For those traders who are able to initially move on from trades where they feel they are correct but the market moves against them, another common theme which arises is for a trader to initially stick to his forex trading strategy, but after being proved correct and missing out on gains he becomes frustrated and deviates from his plan so that he will not miss out on another profitable opportunity.

One place of many where I have seen this time and time again is when watching traders who trade reversals at support or resistance levels. Many times when the market touches a support or resistance level it will have a brief spike upwards or downwards which hits the stops of a trader looking to profit from the reversal, taking him out of the market just as it turns in his favor. Because many traders think a like, often times the level at which the trader is taken out of the market is right at his stop level as well.

After this happens once or twice to a trader he will then stop placing hard stops in the market and instead convince himself that he will manage the trade if it moves against him. This may work a few times for the trader giving him more confidence in the trading strategy until the market does finally break. As we have learned about in previous lessons often times when the market breaks significant support or resistance levels it will break violently to the point where the trader in the above situation is quickly down a large amount on his trade. Typically what will happen at this point is instead of taking the big loss, learning his lesson, and moving on the trader will remain in the position or worse add to it with the hopes that the market will turn back in his favor. If the trader gets lucky and the market does turn back in his favor this only goes to support this bad habit which will eventually knock him out of the market.

Successful traders realize that situations such as the above occur constantly in the market and that one of the main things that separates successful traders from unsuccessful ones is their ability to accept this, stick to their strategy, accept that loosing trades are a part of trading, and move onto the next trade when the market does not move in their favor.

That’s our lesson for today. In our next lesson we are going to look at another major part of trading psychology which is related to not wanting to take losses which is people’s desire to follow the crowd.

As always if you have any questions or comments please post them in the comments section below so we can all learn to trade together, and good luck with your trading!

hi david,

so true what u teach in this lesson... i already experienced that myself, luckily only on a test account...

im really glad i found your page. keep up the good work...


thanks a lot,

cash

ps. if u could manage to find easier images for the image verification i would really appreciate, since im colourblind and most of the times i see only 5 out of 6 letters

Hi Cash,

Thanks for the comment I am glad you like the video. I also agree with you on the image verification it is hard even for me and I am not color blind. This issue is supposed to be addressed by the site software that we are using in the next version and we are in the process of upgrading so hopefully it will not be a problem for much longer.

In the meantime if you would like to send me an email with your desired username I will be happy to register it and send you back the details. My email is david@informedtrades.com.

Best Regards,
Dave

Dear David,
When a trader analyse and open a position it's common that the market won't go up 30-50 pips for example in one move, the price will fluctuate up and down before it's continues to the profit pips that a trader thinks it will reach that level.
So it's normal from the trader point of view that the market may go downwards when he go in a long position before it's go north, but unfortunately the price may go south and hit the stop loss (if specified). so I think it's normal that the trader will stick to the position and won't close it before it hits his SL.
Is there a way that we can predict the price will hit our SL before it do so to reduce our loss. I know it's a long question but I had red many times about the strange behaviour done by traders when they stick to a lost position.
What will you do if you encounter the same scenario, will you close your position immediately if the price move against you?
Thanks N Regards,

Hi themillionaire08,

Glad to hear from you.

Below are several videos on methods some traders use to protect their stop losses from my free basics of trading video course which should help answer your question:

Money Management: How to Determine an Initial Stop Level

How to Set Stops Using the Average True Range (ATR)

How to Up Your Chances For Profits When Setting Stops

How to Reduce the Chances of Being Stopped Out on a Trade

How Many Successful Traders Incoporate Indicators When Placing Their Stops

Have a look at those and let me know if they do not answer your questions.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Thanks very much for sharing what you know. At first, I just saved money from work not knowing at all what I was going to do. Now knowing the basics of technical analysis and buying on the breakout instead of just jumping on a moving stock has
helped me too. Thanks. Wish me luck.

Hi There,

Glad to hear from you and best of luck.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.