Many retail traders with little capital often exceed the risk limits and open too big orders hoping that they could live by trading. This is sometimes a part of their trading plan actually...
This is what we call overtrading - it is the simplest way to losses and/or burning down your account even amongst the most experienced traders.
Therefore if you eliminate the possibility of overtrading (i.e. by a proper construction of your trading plan) - you will minimize the possibility of experiencing losses. This is applicable throughout your entire career as a trader!
1. Unjustifiable large amount of opening orders.
2. Large number of hours in front of the screen.
As the research show, most of the problems in trading comes from those two reasons. The third reason is opening too large trades compared to the capital trader has got. I will talk about that later on.
Too many hours in front of the screen can weaken you intellectually (so your ability of proper analysis of the market and consciousness gets lowered drastically) and emotionally (when there is nothing going on, there is a pressure to do anything, even if it makes no sense).
High number of entries, especially made by beginners, create highly stressful situations, that result in impairment of concentration and proper analysis.
Overtrading leads to both mental and emotional exhaustion, and the worst case scenario - it leads to a trauma.
The belief that emotions are a main source of problems in trading is a ... myth.
The whole thing is the other way around: overtrading causes emotions, and those lead to wrong decisions.
After some time trader is trapped: wrong decisions cause emotions and those cause other wrong decisions. Losses are inevitable then.
Emotions are a consequence of faults in trading, not the reason. If you want to eliminate emotions, eliminate possibilities of overtrading and you will eliminate the reason.
The second myth is a quite common idea that only losses cause bad emotions. That's not true - emotions caused by high profits are even more dangerous. This is because euphoria blinds us, it makes us feel that we are invincible. The feeling itself is quite pleasant, but it makes us forget about our market analysis (well, we know everything about the market, right?) and we start opening too large positions.
Good decisions are being made when we are fresh and after a good night sleep, and the level of our emotions is low or moderate.
Recommendations:
1. The best learning process is steady and systematic development with no grave trauma (heavy losses) or euphoria (big profits).
2. This is possible when you start trading with a micro account - when you encounter real trading situations, but neither profits nor losses cause heavy emotions. So try to keep it balanced: avoid standard lots so both your profits and losses are acceptable.
3. We all love to win, but in order to getting to your steady profits fast you have to stay away from high stakes... and high profits.
4. Winning trades are far more dangerous: they infatuate (so they take away your perception and analytic approach).
5. Separate your trading and your training. When you learn new stuff your mind should be eager and open. High level of stress blocks your ability to learn. Emotions caused by unreal profits (or losses) handicap your capacity of proper analysis.
6. When you are emotional, you cannot stick to your trading plan and you are not disciplined. Therefore lack of discipline is a consequence of grave emotions, not the cause.
7. When you are emotional, you cannot use the advantage your system gives you and this chaos is a straight path to failure.
8. If you noticed those issues in your trading you can do at least those three things:
* Stop trading for some time (a few days minimum),
* Lower your stakes down to a level that does not cause grave emotions,
* Use therapeutic 'tools' - relaxation and/or meditation.
The best way is to use all three the same time.
"After a whole day, you just do not know what you are looking at any more, and you make mistakes. It is better to carefully select trades and wait patiently for a trade that you know "has your name on it." People try to take every trade that comes along because the greatest fear in the market is that of missing a trade. The fear of missing a trade is far more powerful that the fear of losing money. Aspiring traders think that each particular trade might make them wealthy. So they take every trade in case it is "the one," instead of carefully selecting the trade.
Sitting and trading all day long, or trying to take every trade that comes along is also an almost guaranteed way to failure. I have not met many traders who can sit all day in front of a screen and still remain focused. Those who have studied such things agree that the less you trade the more money you make."
