Have you ever found yourself in a pattern while trading, where you make money for a period of time, only to start losing money, and then the cycle repeats itself? This phenomenon is often referred to as a “trading yo-yo” because traders bounce back and forth between the two stages of being profitable and losing money. It’s true that trading is like riding a rollercoaster, which might cause many traders to overlook this pattern or to fail to realize that it is being caused by their own actions.
In reality, the trader begins to make money, which makes them feel overconfident in their abilities, which leads to bad trades. Once you’re losing money, you start to make the necessary efforts to improve your results, so you start taking things more seriously. Then, you start making money again, only to become overconfident once more, thus repeating the cycle. Humans are prone to this cycle in everyday life as well, as many of us have ups and downs when it comes to sticking to a diet, maintaining social obligations, and other activities.
Fortunately, there are some tips that can help you avoid this problem with trading in the same ways that you can find articles that help deal with the yo-yos of everyday life. It may seem like you could simply stick to your trading plan and avoid becoming overconfident, but the answer isn’t as simple. If you really want to overcome this problem and stop experiencing downtime in trading, try following our advice:
- Don’t fall victim to recency bias. To be clear, this occurs when a trader only looks at data from recent events or trades, while disregarding older but equally important events. When this happens, you might only pay attention to your most recent winning trades without remembering the lessons you’ve learned in the past.
- Watch out for overconfidence. You should always have faith in your trading plan, but it isn’t smart to assume that you will always be right when it comes to trading. Remember that the market is unpredictable, so you shouldn’t make mistakes like taking larger than normal position sizes or entering trades when there isn’t reliable evidence to do so.
- Make sure that you don’t measure your self-worth on your account balance alone. Yes, a lot of money in your trading account can make you feel good, but there’s a lot more to think about. You need to remain rational when it comes to winning or losing money.
If you’ve been experiencing ups and downs in trading, you shouldn’t ignore the problem and expect it to go away. In order to keep bringing in consistent profits, you’ll need to make changes to ensure that overconfidence isn’t bringing you down. Try following our tips above and refer to your trading journal to monitor your progress along the way. In time, you’ll likely find that you’re experiencing fewer downs and bringing in more profits.