4 Ways Your Mind Is Tricking You into Being a Losing Trader

Don't think your psychology plays a role in your trading? Think again. Every day we do thousands of things we don't consciously control. This is a good thing most of the time, as we'd never get anything done if we had to actually think about taking each breath, rubbing our eye, standing up, walking, rolling over, gesturing or moving our facial muscles to portray happiness or sadness.

When we start trading, though, all our "auto-pilot" programs are still installed. What helps us navigate the outside world harms our trading. We can't turn these programs off, but we can become aware of them, and take steps to re-program our auto-pilot when it comes to our trading. Here are four ways your mind tricks you into being a losing trader.

Availability Bias

availability bias
Paulo Buchinho, Getty Images

What you hear, see, read or most readily recollect isn't necessarily true. But your mind tends to think so.

Research and thorough digging can usually route out inaccurate "common knowledge," so all traders are advised to personally check facts and figures before proceeding to use said information in their trading.

What harms even more traders, though, is their own experiences. Say you read about a strategy online. Everything looks good, and so you start to use it. You lose five trades in a row. Disgusted you seek out a new strategy. Your own experiences, five of them, tell you this strategy is garbage. But is it? It very well could be but you actually don't know. Your mind has just tricked you into assuming it is.

The problem with personal experience is that it is the most readily available data source, yet almost always relies on small amounts of data. Be aware of small sample sizes. You don't know if something works (or doesn't) until you test it thoroughly. For a strategy that means trading it for a couple months or taking at least 100 trades. At least with a 100 trades, you have some idea of how it actually performs.

Loss Aversion

Our mind views a​ ​loss as more significant than an equivalent gain. We don't like to lose what we already have. This has far-reaching implications when we trade.

When we have a losing trade we may try to avoid actually realizing that loss, which means we open ourselves up to an even bigger potential loss. We rationalize by saying the trade will come back in our favor, or we will give it a bit more room (expanding stop loss) or say we are right and the market is wrong...so we hold the trade out of spite for the market being so stupid. Lots of reasons, but they all stem from the same issue...not taking a loss when you should. Don't fear losses, even with lots of them you can still be profitable.

Plan your exits before the trade takes place and stick to your plan.

Lottery Syndrome

This is seeking out big payoffs, but typically with no real well-defined strategy involved. Gambles are taken. Money is thrown at the market, hoping to hit a big score, but losses will just keep adding up before the payday comes.

The error here is related to availability bias. Because it is very easy to find a price move (in hindsight)--which you could have profited handsomely from--it makes it appear easy to pick big winner trades...they are everywhere!

What you search for you will find. It's easy to forget that there are thousands of potential assets to trade. And you not only need to find the right one, you need to trade it at exactly the right time.

If you do happen to get into a big price swing, it also needs to be traded well. Most people have no idea how to handle this situation when it develops. They take a small profit, only to watch as the price continues to move favorably without them, or they hang on too long, giving everything back. Trading with the hopes of hitting it big on a few trades is a fool's errand. Practice trading common market tendencies; it's in those moves that money resides, not in the elusive unicorn trade.

Knowing Vs. Doing

Our minds often convince us that if we ​knowsomething, we could do it if we wanted to. Take losing weight. Most people know that improving their diet and more exercise will help them lose weight. Yet for some reason, this advice is pushed to the side. Instead, the person seeks out new information..."I know that already, give me something else..."

Seeking information is often just a rationalization for not doing work that needs to be done. It feels productive, but it isn't.

There are basic guidelines which traders should follow in order to succeed, yet these are ignored ("I already know this"...but have you done it?).

These guidelines include making a trading plan, focusing on only one or two strategies, not deviating from the trading plan (so you can see what works and what doesn't), trading in a demo account until the plan proves consistently profitable over many trades.

People read these but become desensitized to the ideas; they mistake (rationalize) knowing a concept for actually following through and doing it. Instead of working on these core trading concepts, they go on another information binge. Yet more information is useless if you don't apply it. Eventually, you need to STOP searching (knowing), and start practicing and applying what you know (doing).

Ways Your Mind Is Tricking You into Being a Losing Trader

These are four ways your trading may be secretly sabotaged by your mind. Your conscious efforts are undermined by strong emotional and subconscious forces. As traders, we need to focus on our actions and results, as they don't lie, yet our minds can. To avoid availability bias challenge "common knowledge" and make sure you're using large sample sizes. Loss aversion is lessened by practiced, and seeing with your own eyes that even with lots of losing trades you can still be profitable. The lottery syndrome is counteracted by evidence...ask yourself how the hunt for a big winner is going? Not working out, try a different approach. This is where "doing" comes in. Knowing you should or shouldn't do something isn't enough. You need to actually do what you should be doing, and practice avoiding what you shouldn't be doing.