HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

Random Reinforcement: Why Traders Lose Money


Are you having trouble with trading? Have you started losing money after a long period of successful trades? Many traders experience the same problem and can’t understand what they are doing wrong. But before you decide to drastically change your strategy or quit trading altogether, you might want to learn about something called random reinforcement and how it can be responsible for your trading failures.

Key Takeaways

What Is Random Reinforcement?

Even though it is often mentioned in the context of trading, random reinforcement is actually a psychological concept. It refers to a paradoxical tendency to draw correlation between one’s actions and a random event.

In trading, this usually occurs when traders experience success or failure and think the reason behind it is their skill or lack of it. Usually, this ends up being true.

But when an amateur trader scores several wins in a row and an experienced trader hits a losing streak, skill has nothing to do with it. It is simply a coincidence. Still, these traders think otherwise, falling into the trap of random reinforcement.

How Random Reinforcement Affects Trading?

You might say, “Oh, but isn’t it good for new traders to get a confidence boost?” or “Well, sometimes even experienced traders need to change things up, it’s not that bad.” But the reason random reinforcement is considered harmful is because it creates a false narrative.

The market movements are unpredictable. The only way traders can succeed in the long run is by adapting to its random nature. So when complete beginners luck out in the very beginning, it can go to their head. They might think they have found an easy way to make money in the trading world. So instead of developing their skills, learning, and improving their understanding of the market, they get stuck in the same place. Soon, however, it will become clear that this tactic doesn’t always work and they will need to learn more about trading to get stable and consistent profit for their trading account.

As for experienced traders, random reinforcement can cause lots of problems for them. When they see their trusted strategy no longer working, they might start to doubt their skills and their entire approach to trading. And when their new strategy ends up a failure, they may actually believe that they have lost their expertise and even quit trading.

So, as you can see, random reinforcement is dangerous as it punishes good behavior and encourages bad behavior, leading to confusion and trading failures.

Why Does Random Reinforcement Happen?

It is just human nature. We, as a species, tend to seek significance everywhere. The existence of random events is hard for us to accept. It would mean we cannot control everything. That’s why novice traders are more likely to attribute their success to their natural talent rather than a coincidence. The same thing happens to experienced traders. They start to worry about their performance and lack of skill while their trading failures are just bad luck.

Examples of Random Reinforcement

Let’s look at some examples of how random reinforcement can lure traders into a trap.

A trading “prodigy”

Jim is a new trader who has just finished his beginner’s course. Jim now knows the basics about the market movements, charts, simple strategies and other bits of information. He also follows the news and keeps an eye on the stock market. All in all, Jim knows just about the same as any other aspiring trader. Soon, Jim decides to finally try real-life trading. He has already practiced with a demo account, so he knows a thing or two about how to trade on the real market. Although he never wrote down any strategies or plans, Jim isn’t worried. He will get there eventually.

When he finally opens the charts, he sees that one of the stocks is currently on the rise. He quickly buys a couple of lots and waits. The price ends up rising even higher, and Jim quickly sells the lots. He actually made money! Jim is elated, but he doesn’t stop. He repeats these actions some more time and manages to profit from all of his trades. He can’t believe it’s that easy! Why did he spend so much time trying to memorize all these patterns and strategies? He knows what he’s doing even without them. He’s a natural at trading.

But as time passes, Jim’s newly found talent starts to let him down. He can no longer profit from his trades. Instead, his balance starts depleting and his commission piles up. He tries to open more positions to make up for his losses, but it’s all in vain. Soon, all his money is gone, but he doesn’t understand how it happened. It has been going so well, hasn’t it?

This is a prime example of what random reinforcement can do to a beginner. Trading without a proper plan and risk management strategy can cause a series of trading failures and quickly destroy a trader’s account.

An incompetent master

This example will show how random reinforcement can affect a seasoned trader. Jenna has been a professional trader for the last 6 years. She has come a long way since her first unsuccessful attempts at trading. She has learned from her mistakes, developed a good strategy and risk management plan. She knows her profit targets, enter and exit points, how to keep her emotions in check, and where to put stop orders. She makes enough from trading to live a comfortable life, and she is always eager to improve her skills.

But at some point, she can’t seem to break a losing streak. Her trades fall through, her losses start accumulating, and she begins to feel frustrated. Jenna keeps going over her strategy, checking whether she is doing something wrong, but it just doesn’t seem to be working for her anymore. She even takes a break to clear her mind, but things aren’t improving.

Desperate, Jenna scrapes her old strategy and decides to use another untested one. But it doesn’t help at all. She starts to think that maybe she has somehow lost all her skill and understanding of how the market works. Perhaps, it is no longer something she can do. She is no longer feeling confident, and even the thought of trading makes her anxious. In the end, she decides to quit trading altogether.

As you see, even experienced traders can fall victim to random reinforcement. Just like Jenna, they start to doubt their own skills and knowledge instead of realizing that it is just an unfortunate coincidence.

How Can You Avoid Random Reinforcement?

The most straightforward way for both beginners and trading veterans to avoid random reinforcement is to prepare a solid trading strategy. Think about your preferred risk level, try to find the best entry and exit points, develop a risk management plan and write it all down. If your strategy works over a long period of time, stick to it no matter what. Even if you suddenly start losing your trades, don’t panic and don’t try to change something that has proven itself useful over the years.

Your well-researched strategy will help you overcome any obstacles as long as you don’t doubt your own skills.

Another important thing for any expert is to never stop learning. Learn about the main principles of fundamental analysis in trading, study the technical analysis tools, and never stop looking for new ways to better your understanding of the market. When you finally figure out how trading works, it will become easier to find ways to adapt to the market’s unpredictability and find new ways to improve your strategy.

Conclusion

Random reinforcement is one of the most common ways traders end up losing their money. It can make new traders believe that they know everything about trading while seasoned traders start doubting their skills.

The market movements are often unpredictable and random. The only way traders can avoid this trading failure is by preparing a well thought-out trading strategy and using it no matter what. Beginners in forex trading can get inspiration from various guides and learn more about forex strategies for beginners and activities for a beginner trader.

#source


RELATED

Top 10 Greatest Traders of All Time

Let’s chill from charts and read about the world's greatest traders who affected markets and left a mark on trading history. Not everything is simple about traders’ success but also about the hundred of past losses...

Trading Plan: How to Limit Mistakes and Minimise Losses

In this article, we provide guidance on how to create a comprehensive trading plan that includes trading goals, risk management rules, and a trading journal.

The Basics of Fundamental Analysis for Forex Market

Fundamental analysis is a trading discipline traders and analysts commonly use to assess the intrinsic value of a financial instrument by examining the underlying assets, industrial conditions and the broader economy...

The top 10 traits of a successful trader

So, you wanna be a trader huh? It’s no secret that online trading has become a lucrative avenue for individuals seeking financial independence in the digital age...

Navigating the Commodities Market: A Comprehensive Insight into Recent Trends

In the intricate web of global markets where economic fluctuations resonate across borders, the art and science of trading commodities have unfolded into multidimensional realms...

How to forecast forex?

There are many articles telling about randomness and abruptness of forex. Some traders believe that it is impossible to predict anything in the market. Such authors try to persuade...

Challenges in Forex Trading: Understanding and Mitigating Drawdown

In the vast landscape of the Forex market, as with all financial arenas, traders invariably encounter numerous challenges. One such formidable challenge is the deposit drawdown...

Mastering Risk Management: Techniques for CFD Trading

Read this article to discover practical risk management techniques for successful CFD trading. Learn about setting stop-loss orders, position sizing, risk-reward ratios, and more...

What is CFD Broker?

Let’s jump into what CFDs are, what a CFD broker is, and how to go about choosing one that bests suit your trading needs. Contracts for Differences (CFDs) are a type of derivative instrument...

How to Avoid Overtrading

In Forex, when traders start excessively buying and selling currency while disregarding their strategy, they are "overtrading". Overtrading is dangerous as it often happens when traders get caught up...

Call on commodities - All that glitters is Gold

Considered a 'safe-haven asset', gold has the highest appeal for investors in the tough times of natural disasters, wars, monetary policy change...

Long Position Vs. Short Position: What's The Difference?

The tried and true formula for successful sales, "buy low, sell high," applies equally to financial markets. Traders use various types of transactions to achieve this, including short positions...

Correlation, Portfolio Returns, and Strategic Hedging

The dance of correlations within a portfolio is a crucial subject for both experienced and budding investors. At the heart of investment strategies, understanding correlation not only protects the portfolio...

Backtesting in Trading: A Deep Dive into Historical Data Analysis

Backtesting in trading serves as a time machine, taking traders back to historical market conditions to assess the potential success of their trading strategies...

Portfolio Diversification: What Benefits Can a Forex Trader Get by Using it?

Collect as many eggs as you can, and don't put them all in one basket - a fundamental principle of a wise trader. Trading is a big road where you can face sharp turns and bumps...

Trading Secrets: Mastering Trends, Breakouts, Pullbacks, and Corrections with Trading Volumes

Embarking on the journey of financial market trading – be it in Forex, stocks, commodities, or the crypto market – requires more than just an understanding of the basics...

Market conditions and their impact on forex trading

In this article, we discuss market conditions, how they are influenced, and how they impact forex trading...

How to Start Trading from Home

The unprecedented COVID-19 pandemic practically confined people worldwide in their homes. But technology helped many people navigate the "new norm", or at least cope with it...

Popular forex trading platforms

Forex trading platforms are designed to help traders navigate the complexities of the forex market, the largest and most active financial market in the world. They typically provide traders with the tools to execute trades and maximise profits...

Predicting a Forex Market Direction

Forex market is changing, and changing cyclically. It means that usually there are such situations on Forex when the price behaviour becomes as predictable...

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.