Why do so many day traders, a majority in fact, lose money? Constant trading causes losses, whether the trades are in commodities, stocks or forex. Why do so many people trade so much? And how do you avoid their mistakes?
It’s Going Down, Sell!
One of the mistakes traders make is selling when a down trend has started. It doesn’t matter if the indicators and forex models say that it will return to a normal range soon. Fear sets in and traders sell on the down trend out of fear. They then lose money that they could have kept if they followed the model and waited for the market to return to its norm. We sell low because of the atmosphere of fear, not the market fundamentals.
It’s Going Up, Buy!
If something is going up, your forex model should indicate when you should sell. If the price is above the point where you bought it, you can sell it regardless of the forex model and still make money. The mistake many traders make is buying on the upswing. If it is going up, they don’t sell and lock in profits; they buy more of it in the hopes that it will go up even further and sell their now higher-dollar-cost-averaged shares at a profit. Those who do not own the investment notice the upswing and pile in, buying something on an uptrend while driving it higher. We make decisions based on apparent popularity or a five minute trend, not the underlying data. And we assume that we know when it will peak, instead of knowing that this is the time to sell or sit it out.
No one knows when the mania bubble will burst, but smart investors are selling to the newcomers and making a profit. When this bubble bursts, those who bought because something was hot are left with overpriced assets that they can only sell at a loss.
You’re sitting there, staring at the screen, waiting to do something. You get tired of waiting. You get bored. So you start trading, regardless of the models, the value of the trade or the likely trend of the shares. The desire to do something, anything, overrides the logical analysis of each trend.
Assumptions that Volume Equals Profits
It is easy to assume that if you make many trades, you’ll price the market right. You may even make the mistaken assumption that day trading will give you experience to rival someone who is better educated about the market and making a few trades. The only thing you can know for certain is that the trading costs of each transaction will eat into your day-trading profits as much as you will pay in taxes.
High frequency trading will drive you to watch the markets more, adding stress and emotion to what should be a logical, analytical decision. By constantly watching the market, you’ll have an increased urge to trade out of boredom, regardless of the value of the item at the time. You’ll try to play the market as if you were playing a game of cards, riding emotional highs and lows instead of setting bids and sell orders that are optimized to maximize your profits. But riding the market feels good when you’re on an upswing, so we tend to keep trading and playing, increasing the costs of a downturn that will, eventually, hit.
Guest post: Johnathon Fox is a professional Forex and futures trader who also acts a tutor and mentor to many aspiring traders. Johnathon teaches a refreshing Forex trading course method to his students and has a real knack for helping traders become consistently profitable.