Psychology of trading, the most common mistakes

Trading is an activity that requires a lot of discipline, method and above all self-control, essentially it is comparable to a high-profile profession where the final performance is closely linked to the result, a huge source of stress for those who are not accustomed to this working logic.

Many find themselves, after an enormous amount of study, many hours spent in front of the monitor and a lot of research regarding the discipline, having to face situations in which they know a lot about the work to be done, but which in the end does not lead to the desired result, i.e. make money. The obsession with making money, haste, lack of discipline, are just some of the most common mistakes in this job, problems that if solved can lead to great successes.

The psychological aspect of trading

Our brain is the control center of our actions. An unhealthy use of the brain inevitably leads to damage to oneself and others, which can be avoided simply by using specific measures for each "disorder", or a situation of psychological discomfort that continues over time.

In the case of trading, the mistake that the trader makes, both in the learning phase and at an operational level, causes a real disturbance when it comes to having to "adjust the shot" in one’s operations. The difference between a successful trader and a learning trader is precisely the management of these aspects.

Let’s take an example: with the same hours of work on the charts, with the same study of both risk management and capital management techniques and with the same IQ, the trader who has the best "Mindset" is the one who will inevitably have success.

Let’s see what the most common mistakes are.

Thinking you know how, the Dunning Kruger effect

The Dunning-Kruger effect is that cognitive distortion which leads a subject to overestimate one’s own abilities and skills without having data in hand to prove them. This attitude, found in many areas of life, is absolutely harmful as it fosters a false self-confidence that leads to inevitable ruin. Socrates said that the wise man is the one who "knows he doesn’t know" and feeds the seed of doubt, which is by nature curious and inclined to update and improve, a classic attitude of "winners".

But be careful: excessive curiosity can lead to never doing anything and immobility in trading, therefore you need the right compromise between frequent updating and practice. Basically, the one who thinks he knows how to do will never achieve a good result if not in the short term, resulting in opinionated and in the long run also "loser" precisely because he builds his personality on a cognitive bias .

In trading, the common mistake is to think you have it all figured out. In this context it is precisely doubt that is the source of success, doubt feeds that spirit of search for the solution that an overconfident subject will never have. Trading is an activity in continuous updating, both at a technical and operational level, therefore, as in any professional activity, one "never arrives". Being aware of what you’re doing is the first step in avoiding this disorder, a recurring problem, albeit in small doses, especially in the early stages of learning as a trader.

Self-sabotage

Self-sabotage is very recurring and easily attributable to traders who have excellent technical, theoretical and practical background. It is purely psychological and mainly comes from the rush that the trader has in seeing the realization of his work results. It often happens, even to professionals, to fall into these psychological traps, of a purely emotional nature.

Imagine that after months/years of work, where money and time are lost, you start earning. Then, after a few months of earnings, there comes a period where you lose money and at a certain point you almost don’t recognize yourself anymore. The trader is literally lost, begins to doubt his own abilities and feeds an insane vicious circle, which directly affects his quality of life.

The professional trader not only does not fall back into these phases, but above all emotionally recognizes their arrival, as he has already experienced them in the past, and takes precise countermeasures. The trader is on the good road to ultimate success only if he starts to see the damage this attitude brings. The countermeasures adopted, some standard and some not, will be fundamental in the future in dealing with these periods which, in some cases, are unavoidable.

Overtrading and dopamine addiction

Trading can be an activity characterized by adrenaline and dopamine rushes. The substances released in our brain after an excellent trade, a large gain or an apt prediction are substances that create a sort of addiction, which will be harmful in the long run and lead to failure.

Addiction to dopamine means that the trader no longer operates with a risk management method or plan, but based on his own emotions. Complicit in this situation are certainly the various clichés created on the figure of the trader, i.e. a very active person who reacts to the fact of "being right" like a bettor who rejoices after winning some money.

This is a huge problem that is present both in the initial stages of learning and in the intermediate stages, mainly due to a wrong approach to this activity. A change in the approach to trading is certainly a key to solving this problem, in other cases a professional could even be called upon to resolve an inconvenience that could easily lead to gambling addiction.

Original article published on Money.it Italy 2022-09-29 08:58:00. Original title: Psicologia del trading, gli errori più comuni