When a demon takes over a person’s mind, as shown in Hollywood movies, that person is said to be “possessed” by the demon. They can’t control their own thoughts or actions anymore because the demon has taken over.
As a trader, you may sometimes feel like you are possessed by a trading “demon,” as if you don’t have any control over what you do on the market and someone else is making your decisions for you. You find yourself making trades when you know you shouldn’t, getting out of positions when you know you shouldn’t, or taking on more risk than you know you should. In the market, it can sometimes feel like you have no control over what you do. Almost like your possessed! Do you recognize it?
In today’s lesson, I’ll talk about some of the most dangerous “demons” that plague traders’ minds and show you how to get rid of them for good. This lesson is about turning something bad into something good. I’ll show you how to get rid of the bad habits and ways of thinking that are stopping you from having the trading success you want and deserve.
The first trading demon is doubt. Second-guessing
When you see a possible trade, it seems “perfect.” Then, instead of setting it up and leaving it until the next day while keeping your attention on the daily chart, you look at the 1-hour chart and think, “Oh, this market looks different now.” “Maybe I shouldn’t make this trade after all? The 1-hour chart seems to be going down, but the daily chart is going up. What should I do? Start having second thoughts.
You decide not to take the trade after spending 2 hours searching online and finding things that agree with your reasons for why you shouldn’t take it, even though the setup is perfect and you can see it on the daily chart. This is a great example of how the “hesitation demon” can take over your mind and make you do bad things in the market. Your mind is a very, very strong tool, but if you’re not careful, it can also trick you. In fact, you can think too much, overanalyze, and worry about the smallest thing you don’t like about a trade that looks otherwise perfect.
Most traders lose because of things like these. People think too much, don’t have enough confidence, and usually just give in to all the negative thoughts they have about why a trade might not work out. This is the best the hesitation demon can do (or worst I should say).
Here’s what you should remember about trading with doubt:
- You can find anything online to back up any idea or feeling you have! Finding something wrong with a trade and then spending hours worrying about it makes no sense. You can always find what you’re looking for on the internet. You can find “data” to back up any conclusion you’ve made, but that doesn’t mean it’s right or that you should look for that data.
- Remember that all we should do is find our trading edge and then make a trade when the edge is there. Trying to find every reason why a trade won’t work shows that you don’t understand how wins and losses happen randomly with any trading strategy or edge. It shows that you want to control the market, which you can’t do. As a trader, your goal is to learn your trading strategy, master it, and stick to it exactly. The mind of a successful trader has no room for doubt.
The second trading demon is Pride, cockiness, or being too sure of yourself
If you trade with a mind full of arrogance or overconfidence, things can quickly get out of hand and you could lose all of your money.
Most of the time, traders get lucky and have a string of winning trades or a really big winning trade (on which they risked too much). This makes them feel like they know everything and that the “Gods” gave them a special talent for trading. But that couldn’t be further from the truth.
A lot of research has also shown that most traders and investors vastly overestimate their own abilities to time the market and their own returns on the market. Charles Darwin said in an interesting quote that “ignorance more often breeds confidence than knowledge.” Meaning that being confident is more likely to come from not knowing what you don’t know than from being smart or knowledgeable. Intelligent and experienced traders usually know the risks and how easily their minds can be “possessed” by trading demons like arrogance and overconfidence. As a result, it’s rare to find a consistently successful trader who is also cocky and full of himself.
How Overconfidence Hurts Investors talks about how education is the only way to solve the problems of being incompetent and being too sure of yourself. Unfortunately, it seems like most investors would rather live their lives without knowing much about investing than take the time to learn about it.
Don’t let your trading account get wiped out because you’re too proud or too sure of yourself. Instead, you should learn how to trade properly and soak up the knowledge of those who have come before you and made many trading mistakes and learned from them. Don’t be the stupid trader who throws his money around like he’s rich, only to lose it all quickly. Instead, be the cool, collected trader who is always trying to improve and knows he doesn’t know everything.
The third trading demon is Fear
Do you want to stop being scared to trade? There is one easy thing you can do that will pretty much take away all your trading fears.
Before we talk about what it is, let’s talk about some of the most common things that traders do when they are possessed by the trading demon:
Traders often don’t want to make a trade because they’re afraid it won’t be a winner or that they’ll lose money. But both of these fears are based on irrational thinking and a lack of knowledge about how trading works in the real world. Once you realize that any trading edge has a random number of wins and losses, you will no longer be afraid that a trade won’t work out. You shouldn’t be afraid of losing money if you manage your risk well for each trade and keep your expectations in line with what is possible in the market.
The best way to get rid of trading fear is to reduce the amount of money you risk on each trade until you are no longer afraid. When people lose more money than they thought they would and see their hard-earned money disappearing faster than they thought possible, they start to fear to trade. Any trader who isn’t first good at managing risks will usually lose money quickly. I’ve talked about how testing if you can sleep with your risk per trade, is an easy way to tell if you’re risking too much or not. If your thoughts are always on your trades, you’re taking on too much risk. Reduce the amount of money you risk on each trade until you stop thinking about the money and start thinking about the trades.
The fourth trading demon is Regret
The regret demon can do just as much damage to your trading account as any other demon.
How often have you been filled with regret because you didn’t make a trade you wanted to? Or, how many times have you regretted not staying in a trade longer because it exploded in your favor right after you got out for a small profit? There are many ways that different experiences in the market can make you feel regretful. But one thing is for sure: if you don’t learn how to stop regret from hurting you, it can wipe out your trading account just as quickly as any of the other “demons.”
To stop being controlled or consumed by regret, you need to stop hesitating on perfectly good trades that meet your pre-set criteria. To stop hesitating, you need to stop being afraid (see how all these demons work together to hurt you?).
It all starts with a well-thought-out plan for trading that you stick to. If you start to stray from your plan, you’ll start to put yourself in situations where regret can creep in. You hesitated and were afraid, so you didn’t make a trade that would have worked with your plan? You’ll be sorry you did that. If you feel bad about it, you might want to get back at the market, which is the next trading demon we will talk about.
To be a successful trader, you really do need “ice in your veins.” This means that no matter what happened on your last trade, you have to be able to move on and get back on track. When you start letting your last trade or mistake in the market affect your next move, you are basically turning into a trader who only trades based on how they feel, and those are the traders who burn out very quickly. A professional trader doesn’t let regret control what they do on the market because they know it will be there tomorrow. Instead, they use each failure or mistake as a chance to learn and grow as a trader so they don’t make the same mistake again.
The fifth trading demon is Revenge
As I said before, if you start to feel regret, it won’t be long before you want to get even. Trading because you feel like you need “revenge” is a very slippery slope that can wipe out your account faster than anything else.
As was already said, revenge can creep up after regret or after a big loss. A trader’s main problem is that revenge and anger are basically the same thing. You might be angry because you missed a good trade because you hesitated and overthought it, or you might be angry because you left a trade too soon and didn’t stick to your trade exit strategy. Whatever the reason, anger will quickly lead to a revenge trade, which can be the most dangerous kind.
Most of the time, a revenge trade is made quickly and with way too much money at risk. Traders usually feel like they want to “make back” money they just lost or make money because they missed out on a good trade. Getting even almost always means losing more than you wanted to, which makes you feel bad, which either makes you afraid or makes you want to get even more. All of this is like a big trading-demon cycle, where one demon leads to another and another, and so on, until you have no money left.
The best way to stop trading for revenge is to get rid of the feelings that lead to it. So, don’t deviate from your trading plan and make stupid trades that you’ll later regret. Also, don’t risk too much on each trade, which can cause you to lose a lot. Both of these things can lead to revenge trades, which can cause you to lose even more. You have to stop it somewhere. So, do it right away.
The sixth trading demon is Hope or Greed
It might seem strange to call hope a “demon” of trading, but let me explain…
How many times have you been in a trade and instead of taking profit where you intended, you moved your profit target further out in the hope that the market would continue to move in your favor, allowing you to reap a larger reward (greed)?
In the market, hope and greed are like brothers and sisters. When traders feel optimistic, they get greedy. They start to think that if they make more trades, they’ll make more money, or that if they double their risk, they’ll get a big payoff. They’re being greedy.
On Wall Street, there is an old saying that still holds true today: “Bulls make money, Bears make money, but Pigs get slaughtered.” It means that pigs are greedy because they eat a lot, and if you’re greedy in the market, it’s only a matter of time before you get slaughtered, which means you lose all your money to the market.
If you let greed control you, you will lose your trading account. Not making a lot of money should not be the goal of trading. Instead, it should be about winning and becoming the best trader you can be. If you do that, you will make money as a side effect. When people put money first, they are being greedy and end up losing. To win at trading, you have to do the right things, which usually means you make money slowly at first. So, if you are greedy and want to make money quickly, you won’t be able to trade in a way that will lead to long-term success.
The seventh trading demon is Not Knowing
Ignorance is the last trading demon we will talk about. This one is easy to figure out, because if you don’t know much about trading, you won’t make much money.
But I think many traders have trouble because they don’t even realize they don’t know much about trading. They spend too much time studying the wrong things, like trading based on indicators or day trading, both of which can slow you down and make you study for years with nothing to show for it. There is a much easier and smarter way to do it.
Realizing that you can’t control the market and that you can only control yourself is a big step toward no longer being a clueless trader. Once you start to focus on controlling yourself instead of the market, you will stop using things like indicators and day trading. This is because traders use these tools to try to “control” the market, even though it’s not possible. But these things give traders the feeling that they have more control over the market than they really do. You will feel in control if you look at small time frames like a day trader or put 5 indicators on your charts. But all you’re doing is making the process of technical analysis more complicated than it needs to be, which is a very stupid thing to do.
The idea for today’s lesson came from the fact that I’ve dealt with all of these “demons” at some point in my trading career and have learned how to get past them. I want to help you do the same. I’ve been where you are now, and I’ve had the same bad habits and obsessive behavior in the market and in life as you may be having right now.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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