Trading Psychology – Why do we Fail?
Trading is gaining a lot of prominence these days. Today, young people in developed and developing countries are enrolling to courses that teach them how to trade the financial market. Unfortunately, there is a lot of misconception about how the financial market works. This has led to many traders losing money. In fact, studies have revealed that only 6% of traders make money. 94% fail. In this article, I will highlight the five stagesabout the Trading Psychology.
#1 – Unconscious Incompetence
This is a stage that we all go through. Here is how it happens. You take a copy of Forbes magazine and read about a trader who recently made millions. You then go online and watch videos about traders at Wall Street and The City who live in mansions worth millions and drive Ferraris. You then gain interest in the business and register for a demo account. You open a few trades and make good money. Then, after a few days, you believe you are now an established trader. You open a Live account and open trades without any analysis. Within a short while, you lose all the money. This stage is similar to when you are buying your first car. You think that buying a car is a simple step. You go to a dealership and select a car without asking key questions such as the consumption of the car. Soon, you will realize that you bought a guzzler that will cost you a lot to maintain. Most traders end at their trading careers at this stage.
#2 – Conscious Incompetence
This is the stage where you realize how little you know about trading. You realize that you need to put in more work in your trading strategy. So, you start getting the knowledge from all available sources. You start watching YouTube videos from ‘professional’ traders. You start reading hundreds of eBooks (and there are many). You start experimenting on new systems and technical tools. This stage can last from a few months to years. 60% of traders will give up in the first three months. Only a handful of traders will make it from here.
#3 – The “Aha” Moment
This is the moment you realize that the problem is not the system. You realize that in the financial market, you don’t need all the tools that you have read. You realize that you can still make money by using a simple moving average. You also realize that there is no real expert who can predict what the market will move in the next 20 minutes. This stage is when you realize that making money in forex takes more than a system. You realize that there are trades that will go your way while others will not. Even when you lose money, you realize that its just a process and not the end in itself.
#4 – Conscious Competence
This is the stage where things are going really well for you. At this stage, you only make trades only when your system tells you to do so. If your trading system tells you not to enter a trade, you wait. At times, you can wait for hours before the signal is triggered. This is also a point where you break out most of the times. Though there are times when you make losses, you are consistent with your wins. This stage lasts for almost 6 months. Only a very few traders reach this stage.
#5 – Unconscious Competence
This is the stage which only a few patient traders reach. This is a stage that takes years before it is achieved. At this stage, trading becomes boring the way it should. At this stage, you have spent years looking at charts such that you have a clear understanding of the way you like your charts. Entering and leaving trades will be a normal thing. At this stage, while you will make losses, they will be more mitigated.
Trading Psychology – Useful Links
- Discover more about Trading Psychology on Investopedia
- Learn more about Trading Psychology on TradingPsychologyEdge