Making money requires a trader to place trades that are ultimately ‘correct’ and deliver a profit. Because of this, many traders develop the mindset that they must be correct on every trade.
If you cannot accept the fact that you may have been wrong on a particular trade, you will find it hard to close out of a losing position. Instead, your mind will find ways to convince itself that you may yet be proven correct and the trade may swing around and be profitable. There is a risk that subconsciously, you will see evidence that supports what you want the trade to do, while becoming blind to evidence that suggests you are wrong.
If you can accept that you won’t get every trade right and that you don’t actually need to get every trade right, you will be in a much better position to manage your trade effectively.
Being wrong is something that we are conditioned from a young age to feel bad about. Instead, we are taught through positive reinforcement that we should feel good (and even self congratulatory) about being right. This can present serious problems when trading.
By frequently checking on your open positions you will know what your overall exposure is and whether you are in profit or loss.
If your losing trades cause excessive emotional distress, you will find it difficult to analyse the market rationally. There is a danger that you will start over-trading in an effort to make back losses or to ‘get even’ with the market. This is likely to place you in an even worse financial and emotional position.
On the flip-side, profitable trades can generate feelings of elation and invincibility. If you make the mistake of allowing this emotion to take hold, you may find yourself taking excessive risk or making silly mistakes through carelessness.
Where possible, you should aim to keep your trading related emotions under control. Using a tested and proven strategy can help you minimise mistakes associated with emotion.
Another mistake that is common among traders is the desire to focus only on positive outcomes. People tend to start thinking about how they might spend their potential profits, while ignoring the downside risks. Wiser traders will focus on the downside risk potential of each trade and will make sure that this is within their predefined parameters.