We always hear this phrase from experienced traders that Psychology is one of the most important aspects of trading.

But, How does it affect your trading results?

Has it ever happened to you that just after your biggest winning trades, you got your biggest losses?

Or, you were ready with your analysis, but couldn’t pull the trigger when the opportunity came?

In this article, we will be talking about 5 psychological biases which ruin your trading results, and what you can do about them.

So let’s deep dive into it, shall we?

House Money Effect

“My biggest losing trades have come just after my biggest winning trades”

And I’m sure that many of you would have also experienced the same.

But, why does it happen?

See, Whenever a trader makes substantial amount of gains from the markets, he will treat those gains like it’s free money, and even if he loses it, it’s not much of a problem.

Well, This is the problem!

The feeling that it's free money makes you take more risks, and you get into a gambling mindset.

If the money is in your account then why are you treating it like it’s not yours?

If you had 100k in your account and you made 10k profits, then your cap is 110k now, but most traders treat it like their cap is still 100k and 10k is the gambling amount.

And, then you end up losing a big chunk of your trading account.

So, What can we do about it?

1. Once the profit is in your account, don’t consider it as free money.

2. Don’t take higher risks, just because your last few trades were huge winners.

Fear of Pulling the Trigger

The difference between unsuccessful and successful traders is that successful traders are able to execute their analysis whereas unsuccessful traders aren’t.

So, why is it so hard to execute your plan?

Too Much Risk

This is probably the biggest reason that is not letting you execute your plan.

Most traders say that they are okay with losing money when their stop loss gets hit, but in reality, they are not.

Why?

Because they are trading with a size with which they are not comfortable taking the stop loss.

This happens because we want to make some quick bucks out of the markets, but the markets don’t care, they will do whatever they have to do.

And if you are serious about this business, then understand that you will have to take hits and you will have to bear 4-5 or even more losing trades in a row.

So, the first step towards profitability in trading is understanding your Psychological risk-taking limit.

If you are a beginner and you feel that your psychological risk-taking limit is 1% per trade.

Then you should risk only 0.5% per trade, and I can assure you that you will be able to execute all of your trades without any hesitation.

You just have to do 50 trades with this size, and you will become comfortable making and losing money with it, then you can slightly increase the risk to say 0.75% and then keep trading with it for the next 50 trades.

Analysis Paralysis

"Too much analysis is injurious for your equity curve."

In simple terms, analysis paralysis is a person’s tendency to over-analyze or over-think upon a decision to such an extent that he/she fails to make a choice resulting in a paralyzed state of inaction.

Let me give you an example, maybe then you can relate to it.

Let’s say a trader named Rahul mainly trades nifty, and according to his analysis, he has to buy Nifty once it crosses 17500.

Nifty crosses 17500, but Rahul wants to get sure if this is the right time to enter the trade or not, so he starts checking various indicators like RSI, Macd, and whatnot ……

Then he thought that what would be better than asking his Twitter guru, who knows everything in advance ;)

While he was doing all of this stuff, Nifty went up to 100p.

He missed the trade!

This story was not only of Rahul but of most of the traders who are reading this article.

Most of us in the name of “confirmation” overanalyze the trades so much that we miss the good ones, and then what is left are the bad trades.

So, what can you do about Analysis paralysis?

KISS (Keep it simple stupid)

The more complex your system is the more is the chance that you will get into the grip of Analysis paralysis.

By complexity what I mean is the number of variables you have to check before a signal is confirmed, the less it is the better it will be for you.

Embrace Uncertainty

Another reason that stops traders from taking their trades is the uncertainty, what if the trade goes wrong?

Going wrong is considered a failure by most people!

But you have to understand that Losing isn’t a failure, it’s just an inevitable consequence of reality.

Every successful trader understands this fact and that’s why they are profitable even with 30-40% accuracy.

Well, in short, I can say that there is no holy grail in trading and you have to go through losing streaks with whatever system or style you choose.

P&L Oriented Process

You might have heard from many experienced traders that you should try not to focus on your P&L.

The reason behind this is, Right decisions lead to the right results.

So, what you should be focusing on is the process, because only that will lead to Profits.

If you focus just on the Results (P&L), then you will have problems like cutting profits early, holding your losses, averaging your losers, etc.

You will cut your losses on the minute retracements, and also you will hold your losers cause that loss seems too big to be booked now!

The cure to this is “Don’t look at your P&L”

You can measure your performance Using R-based methods, that’s better than looking at your P&L.

Wanting every trade to be a winner

Let’s accept that we love winning and for a trader it’s a different level of feeling to say that I was right 9 out of 10 times, i.e “Maine bola tha” ;)

Right?

Well, this is the reason why most traders are not able to make money from the markets.

They fall in this vicious trap of wanting to be right every time, where taking SL is considered to be a sin!

Trailing too fast just so that you don’t make a loss on the trade is one of the symptoms of this “win every time” Bias.

At least I made this mistake in my initial days, that once the trade gets into little profit, I used to Trail prematurely.

And the stock used to retrace back, hit my SL, and then run again towards the favored direction!

But I was out of the trade and because of this many times I missed some of my best trades.

Just because I didn’t want to see a loss in those trades!

The cure to this is to not treat losses or taking SL as something bad.

In Trading Losing money is not necessarily a loss but the cost of taking a risk.

If you want profits then surely you will have to bear the losses, the key is to minimize the losses and maximize the gains.

Not able to follow the plan

Every veteran trader says that you should make a trading plan, and many traders take this advice seriously and they do make a plan.

But, the problem comes in executing that plan.

Well, let’s take an example so that you can relate to it.

We all know that to make money you should hold your winners, Right?

But, when the time actually comes to hold your winners, most traders can’t stop themselves from booking the profits prematurely.

So, why are they not able to hold their winners, when they know that it’s the right thing to do?

Because Booking small profit is the path of least resistance, it feels good to book profits.

But how to change this mindset?

Mental Shifting

The problem with Holding your profits is that you might have to bear short-term pain like a profitable trade might turn out to be a loser or it might turn out to be a scratch trade.

So, here you are focusing on the short-term pain (of holding your profits), but if you focus on the big picture, you will know that over the long term holding your profits will yield you higher returns.

So, you just have to shift your mindset from short-term pain and focus on the longer-term results.

Once you realize that following your plan will lead to higher profits in the longer term.

You will have the courage to bear short-term pains, i.e profits turning into losses, Scratch trades, etc.

Final thoughts

Every problem has a solution, but you have to search for the solution at the right place.

And that’s where most people go wrong!

For a long time, I thought that the answer to my trading problems can be found in charts or by learning more about technical analysis.

I was so wrong!

The solution to my problems was not in charts or any analysis, it was in my mindset.

As I always say, before learning more about technical analysis, try to learn a bit more about yourself.

So, that’s it for today from our side. Thanks for reading. If you enjoyed reading this article, do us a favor and share it with your friends over social media.