Updated from its original posting on April 26, 2010
In all my years of trading and talking to fellow traders, I have noticed that newbie traders are susceptible to four main psychological pitfalls. Let’s take a look at each one and examine them carefully. Hopefully, after reading this, you will be able to see them coming and stop them before they destroy your account.
1. The Desire to be Rich
The desire to be rich manifests itself in many ways. If you think about it, the majority of the issues that newbies have, such as overtrading or poor money management, stem from the desire to be rich.
Forex will not make you rich in the short term. It will likely take years before you’re trading well enough to leave your day job. If you started trading last week and you plan to quit your job in six months, because you anticipate being rich enough to buy a Ferrari, you are delusional.
Forex trading is a career, not a get rich quick scheme. If you want to be rich quick, hit the casinos. You have a better chance of winning there.
2. Fear of Losing
It’s hard enough for newbie traders who have limited knowledge about currency trading to pull the trigger and actually take a trade. It’s even harder to keep on doing it once they have experienced losses or they have lost some of their profits.
Some newbies trade on demo accounts for two years, never summoning the courage to open a live account. Those with live accounts panic whenever they enter a trade and, in turn, make rash decisions.
I think losing some money to the markets is actually beneficial. It teaches you very important lessons. What is damaging is the fear of losing money. The fact that you think about it puts you at much greater risk of it actually happening. You have to trade with a positive attitude. So get rid of those fears and worries, they will not do you any good.
The truth is that’s unavoidable to lose money to the markets. Every professional trader has lost money. Not every trade will be profitable. The market simply doesn’t always work in your favor, and there are times, especially as a newbie, that you will be stung. If you end up blowing your first live account… so be it. As long as you pick yourself up, learn your lessons, and try again, you will be a better trader for it. I blew two accounts before I started trading profitably.
3. The Need to be Right
Meet Tom. Tom opens his platform and enters a dumb, baseless, long trade. He targets 100 pips and has a 50 pip stop loss. The trade goes against him immediately.
It goes down, first ten pips, then twenty pips, and then thirty pips. When it reaches forty pips, Tom decides he doesn’t want to lose another trade and moves his stop loss down.
The price keeps falling and Tom continues to move his stop.
Eventually Tom closes out his trade and he has lost a huge portion of his account.
Tom was not able to accept that he was on the wrong side of a trade. He kept pushing the stop down in the hope that it would eventually turn around. The need to be right is an account killer.
4. Being Undisciplined
I saved this one for last because, even though it is one of the most common and dangerous pitfalls, it is rarely discussed. A trader who lacks discipline can never make it in this business. Many traders are guilty of lacking discipline for many different reasons.
The main culprits are what I like to call ‘System Jumpers’. These are traders that are constantly tweaking and changing their trading methods. These traders do not realize that learning to trade a system efficiently takes time.
System Jumpers are traders who lack the discipline to stick to, and learn how to trade, a system. They try it for a week and when it doesn’t work they jump to the next system or method.
Another common action of an undisciplined trader is abandoning a perfectly good trading method. Every trading method has periods in which it performs below average. No matter how versatile a method is it cannot perform, at peak efficiency in all market conditions. A true trader has the discipline to stick it out through the hard times.