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.