How many times have you had a very profitable trade, or a series of such trades, and gave up all the profits shortly afterwards, or even more? I don’t know much about you, but this script was one of those I found myself repeatedly at the beginning of my career. So I know how frustrating it can be.
Read on to find out what I found out about why traders are giving up profits and how to put an end to it once and for all …
The psychology of giving away profits
There are probably many reasons for giving away profits again and again, one thing is common: the freshness effect.
The freshness effect is a psychological phenomenon that describes how people are more likely to remember and act according to recent events, rather than what happened before. This seems to be human nature, but as traders we need to understand the deep implications of the fresh effect on us if we allow it to influence ourselves.
When a trader focuses too much on his recent performance, it causes him to lose perspective. In trading, it is EXTREMELY easy to be influenced by our recent trades and this can make us do all kinds of stupid things.
The freshness effect is the primary reason traders return their profits to the market. The main reason here is false confidence in your own trading abilities …
See also: 17 Trading Tips To Use Today!
False Confidence: The Enemy in Disguise
When we get too much affected by our recent deals (freshness effect) it usually manifests itself with a feeling of false confidence.
For example, a novice trader may be lucky and start off very well by hitting a series of three profitable trades in a row, which is possible even if he doesn’t know what he is doing. Now let’s say the market conditions at the time of the winning streak were ‘straight’; very strong trend, easy to make a quick profit. Then suppose the market conditions suddenly change but the trader just keeps trading because he feels very confident after making ‘easy money’. Lack of education, understanding and experience coupled with false confidence causes the trader to continue trading, but now loses all the money earned on three previous trades.
This type of situation occurs very often and almost every trader experiences it at some point. False self-confidence makes you feel smarter than you really are, as if you possess some ‘gift’ that ‘other people just don’t have’. Well, you probably don’t have that gift (it’s rare) and when you do, it’s a warning sign letting you know your potential losses in the market.
The key to overcoming the Fresh Effect and false confidence is to remember that thinking in terms of probability is the essence of sustained success in trading . In other words, we trade probabilities, not certainties, and each trade is unique and independent of the previous one; so the result of your previous transaction has no bearing on the next one. You have to think so if you want to have a good mindset in trading. It is when you start to give too much importance to your recent trades that you lose sight of your trading plan and long-term goals, and you start to lose money regularly.
Cold, hard, cash.
There is nothing more real than cold, hard cash in your hands. Feeling and smell is something that creates a sensory connection and, as a result, an emotional and psychological connection. This is a bit different than when you just look at the numbers on a computer screen.
What am I going to?
When we never touch the trading money, especially the profits we get from trading, it becomes intangible and therefore irrelevant to us. In short, we care less about them.
What’s easier than giving away trading profits that you don’t care about? It guarantees that when you hold $ 500 in your hands and another trader comes and wants to take it from you, you will probably hit him in the face, right? However, when the same $ 500 is on your computer screen and you can’t see who is taking it, you just shrug your shoulders and feel a little nervous about the loss, and maybe put another $ 500 into your account.
Do you see any problem here?
Here’s the solution: Every month, if you’ve earned money, even $ 10, CASH OUT and then make another ATM withdrawal. Put this cash on your desk or put it in a jar so that it can be easily reached. Take it out once a week, play, smell it, whatever.
Realize this is REAL money and you really don’t want to lose it! Then trade as you feel. In other words, trade defensively to protect your capital as that is how you survive and ultimately thrive in the trading world.
See also: Set and Forget Strategy in Forex
Unnecessarily giving up your trading profits is perhaps the most frustrating part of it, and if you let it get out of hand, it can unleash an avalanche of trading mistakes that will eventually lead to your account being wiped out.
By sharing these insights, I hope you avoid situations where you’ve already built up your account and then lost all your profits. The psychological aspect of such an event can cause long-term damage to ‘trader’s’ confidence. It can be hard to recover mentally and financially, so it’s important that the trader is prepared.
After working with my students for over a decade, I can see that the most common trait they have is overconfidence after experiencing a profit period. I encourage people to remain modest and treat every transaction and every day the same as all the others. There is no room for ego in the market, just as there is no room for impulsive traders who feel the need to prove to the market that they are wrong by usually trading erratically to recoup losses or persistently holding their positions.