Trading Psychology… The Need for Confirmation a Trader’s Curse

I usually enjoy to watch people trade (specially people new to the business) and see how they manage and execute their trades. It is very interesting since it gives me a unique opportunity to reflect upong the reasons why they take certain actions and sometimes even why I take these actions myself. Today I want to talk to you about a very interesting behavior I have commonly observed, a behavior that is prevalent amongst new traders and which is also common amongst experienced traders; the inevitable need for confirmation. Within this post I will explain what I have observed, I will tell you why you should definitely avoid to fall into this psychological pitfall and I will try to provide some guidelines to avoid it.

So what is the need for confirmation ? As humans, we do not feel comfortable when we are the only ones who follow a certain path. We do not feel comfortable when we are the only ones who support a cause, when we are the only ones who have a certain job, the only ones who start a business, etc. We have a need to avoid “psychological loneliness” in our actions and we feel much more assured and certain about something when there are a lot of people who are also doing the same thing. This is the reason why a person is more likely to start a business if a few people around them are also on the same track, it is about company; it is about herd behavior.

The exact same thing happens when people start to trade. I have often noticed that new traders (at least the ones in my ECT project) need a lot of confirmation in order to enter a trade. They do not know what they are doing very well and they often read forums or websites about what people are saying, if people agree with their general view of the market then they are much more likely to get into a position. If the public disagrees, then they go over the analysis again and again trying to find reasons to support their trade and faults behind other people’s opinions. I remember that I often found myself looking within forums and websites after entering a trade, trying to “boost my moral” by finding agreement between my expected outcome and the trades other people had palced. When I started trading I routinely became nervous and confused when people started to contradict my analysis and this even progressed to the point in which I closed trades prematurely due to the psychological effect that other people’s analysis had on mine.

I believe that this behavior is naturally human and it is something we have all done at a certain point in our trading careers. But why is this so prejudicial and how can we avoid the “need for confirmation” ?

Going to third parties to confirm trades is prejudicial due to many factors. First of all, why are you going to trust other people’s analysis above yours ? Why is theirs better ? Do you have a track record of their trades, aren’t most of them in the same or in a worse position than you ? The fact remains that most people who publish market analysis on forums and websites are inexperienced and are not profitable in the markets yet. Many of them however “speak” with a lot of security so people often find their analysis more sound than theirs. It brings a lot of confusion and psychological stress for new traders to expose themselves to the analysis of third parties, I have always found the effect to be completely detrimental to the progress of new traders.

Second, there is the problem that it is a much more inefficient way of learning. People often learn a lot faster when they do all the analysis and execution themselves and learn from the mistakes in their analysis by virtue of a detailed trading journal and analysis over their previous errors. Often people who go through third party analysis will justify their exits/entries by a logic they do not truly understand and not by their personal understanding of the market. It is extremely important for new traders to do the journey by themselves, it certainly takes more time but it is much easier than going the other way around.

But how do you prevent this from happening to you ? How do you run away from the “need” for “psychological company”, how do you run from the herd behavior ? Just take your own decisions and take responsability for your actions in trading. As I have already said a few times, start a detailed trading journal, write all your entry and money management analysis (lot sizing and exits) and do not listen to anybody else. Do not go into forums, do not go into websites, follow your knowledge and your skills and learn from your own mistakes. You need to be responsible for your trading and realize that there is no one who will be responsible for your profits or loses besides yourself, your loses are your loses and you’ll learn from them. In my experience this is the shortest and most efficient way in which new traders adquire skills in the trading arena.

If you would like to learn more about how you too can become profitable in forex automated trading by designing and using long term profitable systems please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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