There are many mistakes new traders make in their trading, but the two most significant and most common ones are:
- Trading too often
- Trading too large
The mathematics of the first is easy to understand and is explained in the Retail Forex Manifesto.
But if over-trading is bad for retail traders, why do so many people still do it?
The not-so-obvious answer lies in our psychological/emotional attitude.
Trading And Drinking Soup
Brian Wansink, a marketing professor at Cornell University carried out a sneaky experiment to observe how the availability of food influenced the degree of its consumption.
Unknown to the eating participants of the experiment, the bowl of soup they were given came attached with a secret tube that kept refilling the bowl. Professor Wansink wanted to study how providing more soup affected consumption levels.
And the results? Those who were provided (unknowingly) with unlimited soup consumed almost 70% more than those with normal soup bowls.
And guess what? None of the unlimited-soup participants noticed they had been slurping on far more soup than usual!
The More You’re Offered, The More You Take
A similar experiment by psychologists from the University of Pennsylvania saw a bowl of M&Ms left in an apartment building, with a small scoop placed at the side.
The next day, they refilled the bowl of M&Ms but this time, they placed a larger scoop beside it.
Can you guess how that affected consumption levels?
When the larger scoop was used, people took 66% more M&Ms.
Same idea, different experiment, same results.
Just as larger serving sizes cause us to eat more, the larger scoop made the apartment residents want more M&Ms.
When ‘More’ Gives You A Stomachache
But what about situations where getting more, leads to problems? Like indigestion from over-eating?
Why do people have a tendency to super-size their drink and fries, even when they have a tough time finishing them?
Adam Galinsky, a psychologist at HEC Paris and the Kellogg School of Management had this to say:
The act of choosing a specific size within a set of hierarchically arranged options is one avenue by which individuals signal to others their relative rank in a social hierarchy. As a consequence, larger options would be selected by consumers, not merely out of a functional need for hunger but due to a desire to signal status.
This sounds like a reasonable argument, since our minds are usually preoccupied with attaining greater material assets. We want a larger car, house, more luxurious meals, more advanced electronic gadgets, etc.
And as a trader, you probably already know that people in general are not rational. We buy houses with guest rooms that are never used, sign up for gyms we don’t go to, and buy books we don’t read.
Logically, we shouldn’t be making these decisions. But on a psychological/emotional/social level, our thirst for ‘more’ is deeply rooted in how we perceive ourselves, and how we want to be perceived by others.
It appears that the reason we consume too much food or buy unnecessary things, is because we see that as a way of elevating our social status.
Brokers Like To Offer As Much Leverage As They Can
As mentioned in the Retail Forex Manifesto, there’s a conflict of interest with many brokers who stand to gain financially from over-trading on the part of their customers. It’s good business for the brokers, but a poor strategy for the retail traders.
Nevertheless, the need to feel significant (socially speaking) leads masses of unsuspecting traders to keep over-trading.
As we have seen, this is due to a psychological tendency that extends to many other aspects of our lives, not just in trading. The lack of self-awareness is in my opinion the biggest problem plaguing retail Forex traders.
So even though many traders know they shouldn’t be taking trades too often (or too large), many will not be able to resist the temptation to fill their emotional void with the thrill of a big win.
Discipline! Discipline! Discipline?
Many “experienced” traders online stress the importance of being disciplined in trading.
But what these people don’t understand is that the problem lies not with the struggle of being disciplined, but in finding a way to trade that requires as little discipline as possible (and still makes money, of course).
As I mention in the Icarus Project, people have been struggling with discipline ever since we lived in civilized societies, and will continue to struggle with it for a long, long time.
Discipline isn’t restricted to the trading arena. People who want to lose weight, quit smoking or achieve anything significant will have some difficulty remaining disciplined. It’s an endless struggle.
So the lie that has been continuously perpetuated about trading discipline is that once you “get” it, it becomes easier to maintain.
The truth about discipline is unfortunately not so rosy.
You see, one can remain disciplined and stick to the trading rules for 2 or 3 months… but what about 2 or 3 years down the road? That will be a LOT tougher to keep up with, and it only gets tougher.
How many times would one have to resist the temptation to do something stupid, each time the opportunity arises?
As long as one sticks to a trading approach that requires discipline to attain success, it is an uphill climb that never gets easier.
The Solution
I’ve spent a lot (and I mean a lot) of time thinking about this problem, and have come up with a solution that’s necessarily unconventional.
After implementing this new approach to my trading, I noticed an immediate change to the way I’d feel when looking at price charts.
I no longer get the urge to go all-in on a “sure win” trade, and I’m spending much less time staring at charts… without a drop in profitability.
In fact, I’m getting fewer losing trades which has dramatically boosted my trading results.
So what did I do?
I figured out a new way of looking at the market (new perspective), and my actions reacted accordingly to it. No discipline was required. The change in behavior came naturally.
I’ve written more about this in the Icarus Project, so check it out when you have the time.
What do you think about it?
Please leave a comment below and let me know what you think about this post!
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