The Psychology Behind Online Day Trading Losses

One of the attributes that we are taught from an early age is that it is good to be right. We probably notice this most at school where we are taught the importance of getting the right answers to pass tests and exams to progress in life. This means that most people come to associate being successful with being right. The problem with this kind of thinking when it comes to trading is that wanting to be right can lead to stubbornness.


Stubbornness often presents itself as an inability to take a loss quickly when the signs are there that you are wrong. However, successful traders have to face being wrong every day because they are simply making their best guess on the market. As Bruce Kovner was quoted in Schwager ‘s Market Wizards: “Michael Marcus taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money”. Essentially what this means is that traders have to face doing what they believe is right but accepting that the market can confound them and act to take losses and move on. Somewhat paradoxically, a good trader needs to be able to act right, by accepting when they are wrong.


The next area where traders have to battle against what comes naturally to most people is acting in response to emotional stimuli. Traders have to observe their emotions but respond to their strategy. Making a decision based on emotions is almost always a recipe for disaster and it ‘s most often done because traders are watching their PL rather than the market.Finally, we come to the nature of hard work. One of the many issues that affect traders is the problem of overtrading. Part of the reason for this is that most traders assume; I am a trader, therefore my business is to be in the market and trade.


A new trader usually takes this attitude into the marketplace with detrimental results on their performance because what they often fail to realise is that entering the market is only part of the business of trading. For most of us it is a natural thought process to make the following assumption: those that succeed are those that work hard. We are taught this from an early age. In trading, we connect working hard with the amount of time we spend actually working i.e. actual buying and selling. It seems fairly logical – a trader only makes his money by being in the market. Therefore it is assumed, the more you trade, the more time you are in the market and the more chance you have of making money. However, this thinking is, in most cases, fundamentally flawed.


For many traders, some of the hardest work we put in is when we are not trading. In the time we spend studying the markets order flow and resulting movements to gain an edge, reading up on the markets mechanisms and fundamentals to improve our understanding, analysing any trades we may have taken and constantly thinking about how to improve ourselves. When we are trading, the hardest work we will do is in the preparation for the trade; in watching, in concentrating, in being patient so we can act at the optimum time that the market offers the highest probability of a successful trade.


Actually, entering the market by buying or selling is the end product of the work we have already done. The point at which we see whether that work has been fruitful.As a result of this it is vital that traders rein in that part of them that makes them want to be in the market at all times and concentrate on only entering at those times that their groundwork has shown them they have a clearly definable edge.

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