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Trading Psychology

9 Psychological Traps In Trading (And How to Overcome Them)

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Written by Timothy Sykes
Updated 8/31/2023 10 min read

With over $7.4 million in career trading profits and over 30 millionaire students under my belt…I’ve seen it all.

Time and again, I’ve watched traders, both newbies and pros, get in their way and self-destruct.

Those gut-wrenching moments when a decision backfires or FOMO clouds judgment…

Instead of thinking clearly…your mind runs wild, making one terrible decision after another.

It sucks…and if you can’t get it together…your trading career can end before it even starts.

One way to win the mental game of trading is through awareness.

That’s why I will take some time and walk you through the nine psychological traps most traders overlook.

And, more importantly, how to overcome them.

#1 Overconfidence Bias

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If you’re a short seller, this will hit home hard. Why? Because short sellers think they’re geniuses. That their logic is always right, and while it’s true, most of the time they are correct, it’s not enough in the trading game.

You also need to get your timing right to make money. And that’s where they typically fail miserably.

However, without them, we wouldn’t have as many awesome short squeezes as we’ve seen lately.

You can’t afford to get cocky in this market. You will be humbled.

I trade scared for a reason, even though my win rate is exceptionally high. 

Solution: Constantly evaluate your trading and performance. I like to review and journal all my trades regularly to identify successes and mistakes. Always be in a learning mode.

#2 Confirmation Bias

This one again will help my short seller pals. Stop focusing only on information that confirms your bias and ignoring contradictory evidence.

The same applies to long traders who love a stock or sector.

If you believe a stock will increase, you might only seek positive news about the company.

Remember, there’s always on the other side of your trade.

Learn to put your ego to the side. And let price dictate your next move.

For example, whenever I get into a trade, I have a couple of reasons why I like it.

But I also know that I can be wrong. That’s why I’m always trying to cut losses quickly.

Solution: Seek diverse information sources. If you’re a short seller, figure out why traders are taking a long position and vice versa if you’re a long.

#3 Loss Aversion

Trading mentor Tim Sykes realizes he made a trading mistake
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The pain of losing money often feels twice as strong as the pleasure of gaining, leading traders to hold onto losing positions for too long, hoping they will turn around.

Make a plan and stick to it.

I always aim to cut losses quickly. Heck, sometimes I don’t even wait for the stock to turn red on me, I will get out if it’s not moving fast enough.

It’s a lot easier to recover from a small loss than a large loss.

I know, because I’ve had to come back from big losses, which totally sucks.

Solution: Respect your trading plan. If you’re someone who needs to use stop losses, then use them. This will allow you to predetermine your risk and exit a position once it drops to a certain level.

#4 Fear of Missing Out (FOMO)

Don’t be this person.

You know, the one who is jumping into a trade because everyone else is doing it or because it seems like a hot trend.

It’s hard watching stocks flying and you not in them. However, are you trading to make money or for the thrill of the action?

If you’re trading to make money, then price matters.

I’m only getting to high-flying stocks if the price is right. After all, I want to give myself the best possible chance to win. That’s why I’m constantly looking for panic dip buys.

Solution: Stick to your trading plan. Only enter trades based on the criteria you know work, not on impulsive emotions or hype.

#5 Anchoring Bias

This happens when you rely too heavily on the first piece of information encountered (the “anchor”) when making decisions.

For example, the ticker symbol NAOV was an absolute beauty last week.

And one I looked to dip buy at every chance.

However, I did not buy it when it had its largest dip of the day…

Why?

Because the company announced a $5 million private placement. In essence, diluting the stock. After that new piece of information was made available, I was no longer interested in dip buys.

Often a trader will anchor to a specific price without taking new information into account.

Solution: Constantly evaluate what’s happening. Is there new information in the stock? Is volume drying up or picking up? Are certain price levels holding or breaking? Be diligent.

#6 Revenge Trading

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After experiencing a loss, some traders will try to recover quickly by making high-risk trades. This is often driven by emotion rather than rational strategy.

Again, we trade to make money, not to stroke our ego.

Accept that you will be wrong, and it’s part of the game.

Losses will happen. And your best chance of recovering from them is by taking good setups.

If you let your emotions get in the way, you will likely make more poor decisions, taking you down a deeper hole.

Solution: Take breaks after losses. Allow yourself time to emotionally and rationally process a loss without immediately jumping back in. If I have a poor trading day, I may take the next day or two off.

#7 Herd Mentality

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This occurs when traders mimic the actions of each other. This is how a lot of short sellers trade. And that’s why they’re getting crushed lately.

I teach my students to think independently. That includes NOT following me into trades.

Solution: Everyone has different risk tolerances, account sizes, and market access. That’s why you need to figure out what works best for YOU.

#8 Disposition Effect

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This occurs when you sell out of winning trades early and hold onto losers.

Now, I get rid of my winners too early, but I also get rid of my losers fast. The reason why I’m consistently profitable is because I win more than I lose…and my winners are bigger than my losers.

Accept that you can be right and wrong. Trading is a numbers game. Let the numbers work in your favor.

If your losses are bigger than your winners, that’s a potential problem.

Solution: Set profit-taking levels in advance if you get out of winning trades too quickly. Also, have a clear exit strategy for both positive and negative outcomes.

#9 Gambler’s Fallacy

This happens when you believe that past events can influence future outcomes in independent events.

Short sellers struggle with this.

For example, you see a stock constantly uptick all day, so you assume it will “have to drop soon.”

That’s how short squeezes happen. And why the market has been so awesome to trade lately.

Solution: Follow the catalysts and price action. Treat every trade as an independent event and avoid drawing conclusions based solely on past events.

Are You Ready To Take The Next Step In Your Trading Journey

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Some traders make it a lot harder than it should be.

If you can master the mental game of trading, it will take a lot off your shoulders.

To help you get better in all aspects of your trading, my team and I have put together a series of live training classes.

In these live training sessions, we talk about stocks, strategy, and mindset.

We bring them to you at zero cost. 

All you have to do is register.

CLICK HERE TO SIGN UP FOR OUR NEXT LIVE CLASS. 


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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”