Friday, May 29, 2009

Why Do We Keep Making the Same Mistakes in Trading?

A reader asks:

How can a person avoid repeating the same mistakes again and again, in spite of planning not to do before trading? Like for example I decide I am not good at picking tops/bottoms and so I wont try to do that, but as soon soon as I am in front of the screen and happen to see a pattern emerging, then I don't wait for confirmation of trend reversal and I take a position anticipating a bottom or top.

The key is recognizing that the behavior you're seeing as a problem is actually a coping response to a threat that you're probably not acknowledging.

For instance, if missing a market move feels like a threat to you and would trigger self-blame and frustration, it will be natural to cope with that threat by trying to avoid missing a move. By entering the trade early and trying to pick tops and bottoms, you are actually managing your emotions rather than your trade idea.

Many repetitive, bad trading practices are the result of a trader's difficulty coming to terms with the inevitability of losing and the fear of the mood swings that losing can bring. To change that mindset, it is helpful to turn losing trades into learning experiences: focus on what you've learned about yourself, your trading, or the market when a trade loses money. Journaling can be an excellent medium for working on that mindset shift.


jeflin said...

If the definition of insanity is to do things over and over again, in the hope of getting different results, I think it is fair to say investors are insane.

That is why we keep making the same mistakes despite ourselves.

Swing Trader said...


Excellent post. I too have suffered from this problem many times before, and it's still a struggle even today.

I think in my case, it's worthwhile mentioning that besides being afraid of missing out on a big move, there's also the unconscious positive reinforcement when you've nailed the Top or the Bottom ... I patted my back so hard when I nailed the Top and the Bottom, it's a GREAT ego booster!

Therein lies the problem - some likes to nail the Top or the Bottom, and as a result, they commit the sins that this trader has too ... the boasting rights are too great to miss ...

But the truth is - not everyone can nail the Top nor the Bottom consistently - they'll probably end up losing more money than making money in the long run I guess ...

Curtis said...

My question to a prospective or losing trader would be: Can you predict (or influence) the future? No, then why do you even expect to make money betting on the future? I would be wary of anyone who claims they can't predict the future and also claims they can make money by trading.

There are 2 sides to a single coin in making money in the market: either you must have a coin that pays out more then a fair ratio or you must have an unfair coin.

If you think the market is being manipulated then you are right. It is being manipulated every single day by traders.

Knowledge is power and false knowledge is a very destructive power. If you keep making the same mistakes then ask yourself if you truly possess knowledge? If you do then you already have the answer.

Ask yourself, what don't you know?

A Student for Life, of Life (and of Markets) said...

It is funny that that you should post this today when I have actually repeated the same mistakes over last two days and lost money (that too in a strongly uptrending market in India).

Thank you for your wonderful posts that teach and help people (like me) all over the globe.

Graham said...

I think a strong metaphor can help keep you on the straight and narrow. I don't mean just use a metaphor to passively describe trading but make it active in your mind.

I use angling as a metaphor for trading. Sometimes the water is fast moving and shallow. I'm fishing for small brown trout. I expect lots of quick bites and losses.

Other times the water is a thick muddy brown and deep. I'm fishing for big, wiley carp. My tackle is heavy and I groundbait beforehand.

Different tradables are like the fish and the market is the stream. If you treat the trade like a fish you can put sensible stops on, take the small losses as a neccessary cost of trading just like losing tackle and you can trade in the right frame for the prey.

neal said...

Why then are tops and bottoms (plus indicator confirmation) so obvious in retro-spect?