Did you realize that the five most lethal factors for traders to fail are all self-inflicted?
Many traders self-sabotage their own trading without even realizing it. When their account reaches nothing, they have only themselves to blame.
While it may be too late for these traders, it isn’t too late for you.
We want to make sure you don’t have the same blind spots as us and, perhaps, avoid the tragedy of a blown account.
We name these negative factors the “O’s of Trading” to make them easier to remember, and there are five of them.
Many merchants have consumed this figurative cereal. Vegan vendors are also available. While it appears to be delicious, if you want to boost your chances of trading success, you should absolutely avoid including it in your trader diet.
What exactly are the five “O’s”?
- Overconfidence
- Overtrading
- Overleveraging
- Overexposure
- Overriding Stop-Loss
Let’s take a closer look at each one of the O’s.
Overconfidence
Overconfidence is more than just the belief that you can manage anything. Overconfidence is defined by an overestimation of one’s own trading abilities.
Being self-assured is essential for becoming a good trader. You are more willing to take chances or hunt for opportunities when you are confident
However, believing that your trades have the potential to be profitable is one thing; believing that you know everything about the markets and that there is no chance for you to ever lose since all you do is win is quite another.
While confidence is vital, too much confidence can be harmful.
This phenomenon is referred to as the overconfidence effect.
Overconfidence is a cognitive bias in which someone subjectively believes that his or her judgment is better or more dependable than it is objectively.
Essentially, when you are confident, you have a higher opinion of yourself than an unbiased and sensible person (who is not your mother) would have of you given the same set of facts.
Overconfidence is observed by psychologists in three main forms:
Overestimation: the tendency to overestimate one’s performance.
Overprecision: the excessive confidence that one knows the truth.
Overplacement: a judgment of your performance compared to another.
To put it another way, overconfident people believe they are superior than others and overestimate the precision of their knowledge and degree of ability.
For example, if you ask a group of random people to estimate their own driving ability, you’ll find that the majority of them believe they are above-average drivers!
Where are the average drivers if everyone is an above-average driver?
To reduce the consequences of the overconfidence effect, you must spend time getting to know yourself and what you are capable of.
You must be conscious of your limitations and which opportunities are unworthy of your attention.
Above all, you must ALWAYS consider the potential that you are WRONG, be open to fresh evidence, and recognize when you need to change your perspective!
Overtrading (including Revenge Trading)
Overtrading occurs when you trade too frequently, make exceptionally large trades, and/or take uncalculated risks.
Successful traders have a lot of patience. Quality setups take time to manifest, therefore they must be patient and await confirmation.
It makes no difference whether the setup takes two hours or two weeks to complete.
What matters is that they safeguard their capital by waiting until the odds are more in their favor before entering.
You will be able to tell if you are overtrading.
If you finish a deal at a loss and you know deep down that you shouldn’t have taken the trade, you are GUILTY of overtrading.
Do you find yourself gazing at charts for hours on end, attempting to “force” a trade with a “good enough” setup?
Spending too much time staring at charts leads to overtrading since you get prone to falling into a trance when looking at so much “price action” (and indicators) that magical setups occur, which are actually MIRAGES!
Revenge Trading
You may be tempted to “revenge trade” if you incur a huge loss, or a series of losses, in a short period of time.
You wish to “return to the market.”
Revenge trading is when you enter a fresh transaction immediately after sustaining a loss because you feel you can rapidly turn the loss into a profit.
When you incur a huge loss, or a series of losses in a short period of time, you may be tempted to engage in “revenge trading.”
You wish to “return to the market.”
Revenge trading is when you enter a fresh transaction immediately after taking a loss in the hope of rapidly turning the loss into a profit.
When you start thinking like this, your mental state becomes subjective. You become more prone to make more trading blunders, which leads to even more losses.
How do you avoid revenge trading?
- Be fully present and fully focused while trading.
- Make sure you’re in a good state of mind and not currently filled with negative emotions such as anxiety, apathy, fear, greed, or impatience.
- Have a trading plan and stick to it! Always trade in a methodical manner. There is no place for random improvisation when you enter or are in a trade.
If you want to be a successful trader, you must consider long term.
Don’t be concerned over a single loss or even a couple of straight losses. Maintain your concentration on your trading performance in the future months and years.
It is tempting to believe that the more you trade, the more money you will make. However, the opposite is true.
Trading is a game of perseverance. Traders that wait for good setups and sit on their hands in between will be lucrative in the long run. Concentrate on the procedure. Not on the basis of profits.
Overleveraging
Leverage in forex trading means that you can open and control a significantly larger trading position with a small amount of capital in your account.
For example, your broker may allow you to start a $100,000 position with a $1,000 deposit. This is a leverage of 100:1.
The benefit of using leverage is that you can increase gains with a small quantity of capital.
The risk of using leverage is that it might amplify your losses and potentially wipe out your account!
A tiny price swing can wipe out your entire account balance when trading with excessive leverage.
The more leverage you apply, the larger the swings in your account equity. In most circumstances, you will receive a margin call.
When your account equity is bouncing around due to your highly leveraged positions, it’s difficult to keep your emotions in check and not let them influence your thinking.
Nobody will want to be near you while this is going on.
When you trade with low (or no) leverage, you allow your deal “room to breathe” while also protecting your trading capital.
For example, you’ll be able to tolerate larger stop losses while still limiting your risk.
The bigger your leverage, the greater your risk on each trade, which will almost certainly result in illogical decision-making.
Understanding the relationship between leverage and account equity is critical since it defines your genuine leverage.
Here’s a study conducted by a popular forex broker that shows the percentage of profitable traders based on average true leverage.
As you can see, as genuine leverage increases, profitability decreases significantly!
40% of traders using genuine leverage of 5:1 or less were lucrative, whereas only 17% of traders using 25:1 or higher leverage were profitable.
Most expert traders use very low true leverage, rarely exceeding 10:1. That is how they remain competitive.
Regardless of the leverage amount offered by your broker, you can replicate these lower leverage levels by simply depositing additional money into your account and appropriately controlling your risk through good position sizing.
Use true leverage of at least 10:1.
At any given time, only risk 10% or less of your account balance. Never let the total value of all open trades surpass ten times your account equity.
Divide your trade size by your account equity to calculate your true leverage on a single trade.
For example, if you start an account with $5,000 in equity, a 10:1 leverage would require you to open no more than $50,000 in positions (or 5 mini or 50 micro lots) at a time.
The smaller the leverage, the safer the situation. A 2:1 leverage, for example, would imply opening positions no greater than $10,000 (or 10 micro lots) at a time.
If you want to be a long-term trader, employ as little leverage as possible.
Having access to tremendous leverage does not obligate you to use it!
Try to start trading with ZERO leverage when you initially open your live account.
If you have $5,000 in your trading account, for example, don’t open any positions larger than $5,000 (or 5 micro lots) at a time.
With practice, you’ll learn when it’s ideal to use leverage and how much leverage to employ to help you achieve your financial objectives.
Trading with CAUTION should be your priority when employing any amount of leverage.
Excessive leverage reduces the likelihood of profitability dramatically.
Overexposure
When you have many positions open in your trading account, each with a different currency pair, always be mindful of your RISK EXPOSURE.
Trading AUD/USD and NZD/USD, for example, is virtually the same as having two identical trades open because they frequently move in the same direction.
Even if both pairings have two valid trade settings, you may not want to take both.
Instead, choosing ONE of the two arrangements may make more sense.
You may feel that trading in different pairs spreads or diversifies your risk, however many pairings tend to move in the same way.
So, instead of lowering risk, you are increasing it!
This is referred to as overexposure.
Unless you want to trade only one currency pair at a time, it is critical that you grasp how different currency pairs move in respect to one another.
You must comprehend the concept of currency connection.
Currency correlation quantifies how two currency pairs move in the same, opposite, or completely random way across time.
You must understand how currency correlations increase the amount of risk you expose your trading account to.
If you don’t know what you’re doing when trading many pairs in your trading account at the same time, don’t be astonished if your account balance goes poof!
Overriding Stops
Stop losses are pending orders that you place that effectively close out your trading position(s) when losses reach a certain price.
It may be difficult for you to admit you are incorrect, but swallowing your pride will keep you in the game longer.
Do you have the mental fortitude and self-control to keep your stops?
In the heat of battle, what typically distinguishes long-term winners from losers is their ability to implement their set objectives objectively.
Traders, particularly new ones, frequently question themselves and lose objectivity when the sting of loss kicks in.
Negative ideas such as “I’m already down a lot” arise. We might as well hang on. Perhaps the market will turn around right here.”
Wrong!
If the market has hit your stop, your purpose for the transaction has expired, and it is time to exit.
Do not expand your stop.
Worse, don’t override or delete your stop and simply “let it ride!”
Increasing your stop loss does nothing but raise your risk and the amount you will LOSE!
If the market reaches your predetermined stop, your transaction is over.
Take the hit and move on to the next chance.
Widening your stop is essentially the same as not having a stop at all, and it makes no sense!
