A “trading yo-yo” is the cycle of successfully making money for a certain period of time, and then becoming overconfident and careless, which usually leads to losing trades.
The “yo-yo” cycle continues when the trader tries to get back “in the zone” by making the necessary effort to execute trades well. Unfortunately, many traders complete the cycle by becoming overconfident all over again, which leads to more bad trades.
We’re certainly no strangers to the yo-yo principle. In fact, we experience the similar ups and downs in everyday activities such as sticking to a diet, maintaining personal relationships, and even in sports training.
In trading, when you are “up” and winning trades, you easily become wrapped up in your results.
Your string of winning trades can make you overconfident, which can tempt you to start cutting corners and stop doing the processes that helped you win in the first place.
Once you have reached a very high level of success, and become complacent, you’ll probably fall back down to earth on your behind due to mistakes. You may even suffer a huge loss.
It is only during this “down” stage that you realize your mistakes and return to what you were doing previously that made you profitable.
If you have been in this cycle far longer than you’d care to admit, don’t worry. Here are three tips on how you can get off the vicious cycle:
1. Avoid recency bias
Recency bias is the tendency of traders to be influenced by the outcomes of recent events and trades, and disregard the older (but equally important) pieces of information.
This habit is problematic if your trading performance is affected by your fixation on your most recent winning or losing trades.
Here are 4 easy tips to help you eliminate recency bias:
- Keep a detailed trade journal.
- Write down your trade plan and stick to it!
- Always keep in mind the bigger picture.
- Don’t let emotions get in the way.
2. Watch out for overconfidence
While it is important to be confident when trading, it is one thing to believe that your system can work in the long run and it’s another thing to think that you know everything about forex trading and that there’s no possible way you can lose.Once a trader becomes overconfident, he exposes himself to a whole slew of potential problems. The trader may end up trading larger positions sizes than mandated by his trading system.
Or once he stops out, he may try jumping in again in the same direction, thinking that price is bound to go his way eventually.
This is why it’s important to stay humble and keep your emotions in check, even when on a winning streak. If you don’t, you may end up becoming very lenient with your execution performance, and your trading account will suffer in the long run.
The best solution is to stick to your plan and keep your ego in check!
3. Find other measures of self-worth
Another way to avoid the trading yo-yo is to make sure that you don’t base your self-worth on your forex account balance.
If you allow the ups and downs of trading define who you are, you will only create a stressful environment which ultimately will not be conducive for your trading.
Do your best to find a sense of achievement in other areas of your life, such as your relationships, your job, or your hobbies.
Want to connect with your friends more often? Go out more! Want to run an ironman? Train for it!
Doing these things will help you feel more fulfilled and satisfied with your life. The bonus effect will be that it will create a stress-free environment that will help your trading performance.
Take note that overcoming the trading yo-yo is something you’ll have to deal with day-in and day-out.
It’s going to take a ton of hard work, effort, and focus, but if you really believe that you have what it takes, then follow these tips to help you become consistently profitable.