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, walking, or moving our facial muscles to smile.

But the same auto-pilot programs that help us navigate the outside world harm us when it comes to trading. We can't turn these programs off, but we can become aware of them and take steps to re-program ourselves.

Availability Bias

What you most readily recollect isn't necessarily true, but your mind tends to think it is.

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 such information.

What harms even more traders, though, are 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. Your own experience now tells you this strategy is garbage. But is it? It could be, but you don't actually 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 whether something works until you test it thoroughly.

For a strategy, that means trading it for a couple of months or taking at least 100 trades. At least with 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.

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 one.

We rationalize it 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.

All these reasons stem from not taking a loss when you should. Don't fear losses—even with lots of them, you can still be profitable. Instead, plan your exits before trading and stick to your plan.

Lottery Syndrome

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

The error here is related to availability bias. Because it is very easy to find a price move in hindsight from which you could have profited handsomely, it makes it appear easy to pick big winners. They seem to be everywhere!

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 hope 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 ​know something, we could do it if we wanted.

Take losing weight. Most people know that improving their diet and more exercise will help them lose weight. Yet rather than follow this, many people seek out new information instead—the latest fad.

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

Similarly, there are basic guidelines traders should follow to succeed, but which often go ignored. "I already know this," some may say. Yes, 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), and 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 or rationalize knowing a concept for actually following through and doing it.

Instead of following these core concepts, they go on another information binge. But more information is useless if you don't apply it. Eventually, you need to stop searching and start applying what you know.

Ways Your Mind Is Tricking You into Being a Losing Trader

Your conscious efforts are undermined by strong emotional and subconscious forces. As traders, we need to focus on our actions and results. These 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 practice 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 and asking yourself how the hunt for a big winner is really going. Finally, knowing you should or shouldn't do something isn't enough. You need to actually put that into practice.