The Unintuitive Side of Trading: Six Ways in Which “Common Sense” Can Cause you To Fail in Trading

It is quite interesting to observe how new comers to the world of trading almost always make the same bad and avoidable mistakes. Why is it that most people who get into trading  fail in very similar ways? What is it that causes the large majority of aspiring traders to have to flush their illusions down the drain? The answer to these questions is not very easy as you need to find something which is common to a large majority of people from different nationalities, genders, financial situations and working fields. What ties a almost all newbies together? Through my analysis I have found that a big part of the answer seems to be “common sense” as this is a significant part of what makes people fail as traders. On today’s post I will talk about six ways in which “common sense” can ruin your trading and make you fail as a Forex trader.

What is common sense? Perhaps this is the most important question we need to answer before we move onto how it sabotages people’s trading. On this article I will refer to “common sense” as those assumptions derived from most people’s everyday experience, for example we could think of something like predictability as a characteristic derived from “common sense”, since in everyday life events have clear causal relationships (for the most part) a “common sense” assumption is that when things happen in a certain way they forecast others (for example, hand in fire = burning pain). How do these assumptions cause losses in trading? Keep reading to find out!

1. You’re not like everyone else. It has always surprised me how much people think they are more the exception than the rule. When you tell people that 90-99% of Forex retail traders don’t make it past their first year in trading without wiping an account they will rarely falter at their intentions to get into the market. There is indeed a common sense assumption that makes you believe you’re special since – in your personal reality – you’re in fact the only permanent presence and everything seems to revolve around you. Most people believe they can make the difference but in reality – statistically speaking – the percentages stay the same. If you believe you’re part of the 1-10% that will make it when you start then think again, because you’re probably not. Starting in Forex thinking that you need to get into that small percentage instead of believing you are already there is an important step.

2. You act on your gut feeling. In real life intuition is rewarded constantly because it’s derived from decades of experience with the phenomena your constantly dealing with. For example an instinct to check on your children and finding they have a fever is probably a subconscious reaction to some stimuli you aren’t processing consciously. However in trading this stimuli do not exist for new traders and therefore they usually lead to wrong decisions. Many new traders act on things like “I feel the EUR/GBP will go up”, when in reality this has absolutely no relevance at all. The market plays tricks by sometimes rewarding this experience but in the end it all comes down to the fact that “gut feeling” offers no edge for new traders.

3. Bad experience demands change. In everyday life whenever we have a bad experience it generates a subconscious trigger that makes us avoid whichever event caused that to happen. For example I had the “bad habit” of grabbing the underside of  escalators’ moving bands when on shopping malls, something which got “punished” with an electric shock. After doing this a few times I then generated a subconscious response which caused me to avoid doing this every time I was about to do it (talk about negative reinforcement!). In trading a similar thing happens to new traders with short term trading results. Whenever there is a bad outcome they instantly – out of common sense – change what they are doing since this result generated pain (loss of money) which they want to avoid. This “system hoping” based on common sense is definitively a cause of trader failure.

4. You can’t go broker taking a profit. Perhaps this is one of the most damaging phrases which has been ingrained in the general retail trader collective subconscious. The most dangerous aspect is that this phrase echoes strongly on common sense. Certainly if I take profits I will never lose, right? Well the problem – as with most common sense issues – is that taking profits just for the sake of avoiding losing trades is a sure recipe for failure since it completely ignores proper statistical analysis. When people start to get into trades attempting to “lock into profits” as soon as possible they will eventually get into trades where this is not possible and will eventually reach the same point of loss and wipe-out. What I am saying here is that simply “taking profits whenever possible” does not constitute a warranty of success and using such a technique while ignoring all forms of long term statistical analysis of their effects is certainly a way to go into failure quickly.

5. If it’s profitable it MUST be right. Tied strongly to common sense this assumption relies on the fact that in everyday life things which have positive outcomes generate favorable responses in our neurological reward system. What this causes is a great problem which makes traders reinforce behavior which is – in the long run – extremely negative. For example if a trader has been using a martingale strategy for 5 months with a 150% profit and a 10% draw down he or she will NEVER listen to advice against using this strategy, there is a very strong common sense directive to continue using something which “is working”. However the problem here is that something which is profitable is not always going to lead to long term success as succeeding across a few years depends greatly on the overall statistical soundness of the strategies used. Therefore deciding what tactics or systems to use requires a much DEEPER analysis than merely short term profits, a reason why live results without context are meaningless. Assessing the real risk of strategies in the long term is a must for success.

6. Just mirror the loser. There are many people who start as losing traders who eventually reach a realization derived from common sense which seems to be quite reasonable : just do the opposite of what you were doing! However the problem here is that most traders do not lose because they have  a negative edge but merely because they have no edge at all. When you reverse a strategy with no edge you get another strategy with no edge meaning that if you reverse whichever you were doing the outcome will always be the same in the long term (account wipeout). In trading there is a cost which makes losing possible without having a negative edge implying that reversing losing tactics does not lead to profitable outcomes. Finding a negative edge is in fact even harder than finding a positive one because you would have to distinguish it from losses generated on a no-edge strategy while a positive edge strategy simply has to be profitable to prove the point.

As you can see there are several ways in which assumptions derived from our “common sense” sabotage our trading. They can make us believe we are better, make us change systems that work just because of short term losses and even get completely married with systems that eventually lead to wipe-outs simple because we have had some short term rewards. In the end the only solution to the above problems is get rid of your common sense and practice Forex like a business based entirely on statistics and analysis. Build your trading business from the ground up based on long term analysis of strategies with clear profit and loss targets. Run long term simulations of your strategies and see how changes affect them, know what draw downs to expect and know when your strategy is no longer working. Work from statistics and mathematics and NOT from your common sense and you’ll greatly increase the probability of making it as a trader.

If you would like to learn more about my work in automated trading and how you too can learn about trading system building and get a true education in algorithmic retail trading please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)


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2 Responses to “The Unintuitive Side of Trading: Six Ways in Which “Common Sense” Can Cause you To Fail in Trading”

  1. Rimas says:

    Very usefull post with a lot of food for thoughts to consider. Thank you very much.

    • admin says:

      Hi Rimas,

      Thank you very much for your comment :o) As always I am glad you liked the article!

      Best Regards,


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