Trading psychology: the pitfalls

As a beginner trader, you're faced with a lot of new experiences. Everything is new, and you're still trying to navigate the jungle of tools and strategies available to you. To trade successfully, you need a strong mental base and know when to trade and, more importantly, when not to trade.

There will be times when, against your better judgment, you enter a trade. You can't help it because you're falling prey to impulses that have been ingrained in your primal or subconscious mind from a young age: your fight-or-flight response.

Your subconscious mind is busy all day assessing situations and guiding you to act accordingly, enabling you to function in this world. To a greater or lesser extent, your brain makes choices regarding your fight-or-flight response.

This also carries over into trading. If you recognize the signals, you can suppress the emotions associated with this response. This allows you to make choices based on what you see in a chart, recognize candlestick patterns, and trade based on your strategy.

Because trading without a plan and with emotion is like gambling. And with gambling, the bank always wins!

So what are these pitfalls? And what are the solutions to avoid or ignore them?

Trading pitfalls

FOMO

The Fear of Missing Out. You're looking at a chart and see the market suddenly make a strong move.

No apparent reason, no pattern, no tools to suggest the move, yet it happens. You remain cautious, but the next candle forms strongly again. Against your better judgment, you enter the trade anyway, and a few minutes later, the trade reverses completely, leaving you with a loss.

Why? You're afraid of losing a trade. This could be because you've just lost or won a trade, or because you haven't traded at all yet.

Instead of following your plan and strategy, you're following the market. Remember, as a trader, you're just a small fish in a pond where institutional investors dictate the game. That sudden move could be planned by the big players to create liquidity so they can strengthen or defend their positions.

Revenge trading

Despite your sound analysis and strategy, you still close a trade on a losing note. In the heat of the moment, you're eager to recoup the loss without looking at the data objectively. You see a market move, you think you see an opportunity, FOMO kicks in, and before you know it, you're back on a losing trade.

Overtrading

This can go two ways: either you're on a losing streak and you try to trade more to recoup your losses. Or you're on a winning streak and you try to trade even more to make even more profit.

In both cases, it's a losing strategy. Losing is part of trading, so the odds of being right more often than not don't improve by trading more. There's also a greater chance you'll trade more emotionally, and emotion is a poor advisor when it comes to trading.

Overanalyzing

You overflow your chart with all kinds of tools (support and resistance lines, trend lines, VWAP, EMA, ATR, fib retracement, volume profiles, bear and bull flags and so on) that you get conflicting signals.

You simply can't see the forest for the trees. This can make you hesitant to enter a trade, or you might enter one at the wrong time.

Fear and greed

Fear of losing can cause you to exit a trade too early or let a trade move in the wrong direction for too long in the hope of limiting your losses. Greed can also lead you to take excessive risks, deviating too much from your trading plan, potentially blowing your account.

Overconfidence

After a few winning trades, you think you understand the market, you take bigger risks and neglect your risk management. And that risk management is precisely what separates you from a successful trader and an impulsive trader.

Solutions to the pitfalls

Generally speaking, you can say that you need to decouple your emotions about money from the execution. Easier said than done, you might say. When money is at stake, however small the amount, there's certainly an emotional component, especially in the beginning.

But...you've made a decision to trade. You've invested an amount that you know you could lose. And if you also know that losing is part of trading, you shouldn't feel any emotion if a trade goes wrong.

When you start viewing money as a risk unit—a sensible amount you're willing to risk to make money—money's monetary value also fades a bit. At some point, you will just as easily trade $20 at a time as you are to trade $3,000 at a time.

Because a risk unit is always related to the value of your account and the risk/reward strategy you have.

ALWAYS stick to your plan and strategy because this allows you to remove the emotion. It then becomes nothing more than a mechanical action resulting from your analysis: execute and wait for the outcome. While waiting, of course keep a close eye on the trade to optimize your risk/reward. But this should stem from the data you see, not from any of the pitfalls mentioned above.

So briefly per pitfall:

FOMO

NEVER give in! Sometimes you'll succeed, but 90% of the time you'll lose. Choosing not to trade is still trading.

Revenge trading

When you're a revenge trader, you're influenced by the emotions of the moment. This can lead to irrational choices that can lead to further losses and frustration. Stop trading if you experience these emotions. Reset, do something else, and come back after you've rationally analyzed your losing trade.

Overtrading

This is personal for everyone. What I consider overtrading, you consider the start of your day.

As a beginner trader, I'd recommend a maximum of two trades per day. Think of your first account as a learning experience. It's okay to make mistakes, as long as you learn from them. By limiting the number of trades and your risk unit, you can continue learning for the longest period before potentially blowing your account.

Overanalyzing

When you're just starting out, you're eager to learn and constantly searching for new strategies that will give you that winning trade. You read forums, follow Discord groups, watch YouTube videos, and scour the internet for articles.

This is part of the learning process. Where things go wrong is when you overload your entire chart with data.

Experiment with tools and strategies and find one that works best for you. Especially if you plan to track multiple stocks or indices simultaneously, ensure your charts are free of data overload so you can quickly switch gears when the time comes to enter a trade.

Fear and greed

What's your plan for trading? Are you doing it to make some extra money, or do you want to make it your career? Both trigger fear or greed.

Consider your goal and the timeframe you want to achieve it. Is it achievable, or do you need to adjust your target daily? Is this a realistic target, or will it lead you to succumb to fear or greed?

Remove all possible emotional decisions from your plan so that a plan becomes a mechanical action.

Overconfidence

Keep backlogging, or in other words, keep analyzing your trades. Was it truly a perfect trade? Did you stick to your plan, or was it a fluke? Stick to your risk/reward strategy. Don't suddenly start trading larger amounts just because you're on a winning streak. As history has often proven, pride comes before a fall!

Conclusion

Trading isn't just about money; it's also about the right mindset. Because trading isn't necessarily about the money, but about the freedom it can create. Remembering that money is a tool, not the goal, will give you a different mental approach.

This doesn't mean you shouldn't be happy when you make a big first move. Celebrate the moment! But you're only truly a successful trader if you can consistently replicate and repeat a result over a longer period.