Letter published in EliteFxAcademy
Have you ever hit a big winning trade or a series of winners and instead profit you gain loss because you gave all the profit and even some extra back? Don’t worry many of us had the same problem early on in our trading career, so we know how frustrating it can be.
Slide down the page and you will find out reasons for giving back profits and even better you will find a solution.
The psychology of why you are giving back profits…
There are many known reasons why you are giving back profits and not once but multiple times, but one thing they all have in common : RECENCY EFFECT
Recency effect is actually a description of human nature, that is, that we are most likely going to repeat more recently made choices compared to those that came before. But as traders, we need to understand consequences that recency effect has on us, if we let.
When trader pays too much attention to his or hers most recent results, they lose focus and perspective which is EXTREMELY easy in trading and those things lead to stupid decisions.
Recency effect is the mail reason of why traders give back their profit, because it gives them false sense of confidence based on recent successes
FALSE CONFIDENCE : AN ENEMY IN DISGUISE
When we become arrogant by our most recent trades (RECENCY EFFECT) we start feeling a false sense of confidence.
Let’s look at an example : a beginning trader can get lucky even without basic knowledge about trading multiple times in a row. Let’s say conditions on market were »easy« , very strongly trending, easy to quickly profit in. Problem becomes when those conditions change and trader because of a lack of education, understanding and trading skills combines with false-confidence doesn’t change his pattern and keeps trading. But because of changes trader loses all the money they made in previous winners.
This situation is very common and known to nearly every trader. False confidence makes you feel smarter and many start to think they have some trading gift that others don’t. This gift is really rare and you most likely don’t have it. When you start feeling like that, it’s a warning sign you’re about to lose some money to the market
So, how to overcome recency effect and false-confidence? Remember to think that you are trading probabilities not certainties and every trade speaks for itself. So your previous trade has nothing to do with your next one. You need to think so to get in the proper trading mindset, because if you look too much in previous trades, you lose sight of your plan, you once again become over confident and start losing money regularly.
COLD, HARD, CASH
The best and most real thing is cold, hard, cash in your hands. The feel and smell of it creates a sensory connection and that triggers emotional and psychological connection as well. And that is totally different than feelings when you simply stare at digits on a computer screen.
What is the point?
When you can’t touch your trading money, when you don’t feel profit and loss with your hands, you start to care less about it.
For example, if you had 500€ cash in your hands and someone tried taking it from you, you would probably punch them in the face. But when that cash is on your computer screen and someone you don’t see takes it, you become upset but shrug it off and you continue with trades.
Do you see the problem here?
Solution? Every month withdraw some of your profit and put it in somewhere in your working space. Once a week take that money and feel it, smell it to remember how real profit feels once in your hands. Now trade in-line with those feelings. Trade defensively, preserve your trading capital and you will survive and eventually thrive in the world of trading.
CONCLUSION
The most frustrating part of trading is likely unnecessarily giving back your profits. If you let it go out of control it triggers many mistakes which lead you to blowing out your account.
With these insights I want to show you, that you can avoid losing all your profits, which can cause long term damage to a traders confidence. Recover from that kind of fall can be hard both mentally and financially so you need to be prepared. Most common thing to bring you down is »over confidence« followed by series of winnings. The best you can do is take every trade and day as unique. Previous doesn’t matter any more, future is yet to decide. There is no room for egos and impulsive traders on the market, who feel the need to prove the market wrong, usually trading on that impulse to take back what’s lost or stubbornly holding losing positions.Helping you to see and understand problems on market and offering you solutions to deal with them is something I cover in my professional Elite trading course.
