Trader Psychology: Trading on a High

In an aim to increase our focus on the importance of psychology in your trading, Littlefish FX Analyst Nathan Batchelor brings us a new series on Trader Psychology. Here he discusses arguably the most dangerous time for a Forex trader – when on a winning streak

Trading on a High

It might sound odd, but the most dangerous time for any Forex trader is often when you’re winning. Your confidence is soaring as you are now winning, you are a profitable trader and you’re trading on a high. This is a very dangerous place emotionally for a trader to be.

Before I begin to dissect this commonality, I would like to give you a real life example and a moment in my life some years ago when I was struck by this affliction, and how to recognise the warning sings as a FX trader.

A bruising – but crucial – experience

I remember graduating from a year of back testing on a demo account, then onto the hallowed turf of real time FX Trading with a highly leveraged £5,000 live account. In my own mind I was there and nothing was going to stop me. The market was good, the EURUSD was at 1.50, and the Pound was at 2.05. It was a glorious time to be a trader. The market was slipping off from the new highs and it was clear to all that the financial crash of 2008 was about to rock the world economy. I was short, and there was much money to be made by being a bear in this market.

My ego was such that I was waiting for Paul Tudor Jones’ team in Switzeralnd to head hunt me that year, and if I could just finish 2009 with a 100% gain then boy I would have some track record to share.

By mid 2009 stocks were bouncing up, but how could anyone be long when the world falling apart… right? Each rally up on the Major USD pairs I shorted furiously until a combination of lack of margin and losses that I couldnt keep had wiped out my profits, all my available margin and most of my account.

Learning from your setbacks

Three things struck me the most from this unfortunate setback. Firstly, I had a lot more to learn about trading than I previously thought. Secondly, the confidence that I had built up from my winning streak was exceptionally dangerous and something I now needed to monitor. And thirdly? It was clear that year that I wouldnt be traveling to Zurich and trading with the Tudor Jones team!

Back in the present day and I am thankfully in a vastly different place to where I was then, both emotionally and mentally. Thankfully I learned so much from that painful experience and I did eventually learn to become mindful every week when I am on a streak or enjoying very good days and
months in the market.

My 5-step guide to keeping emotions in check

To really break this down into a process or a formula that traders can observe or watch in themselves, I am going to list a 5-step guide below of all the vital signs a trader needs to observe in order to avoid and know when you’re trading on a potentially-dangerous high.

  1. You’re on a winning streak in the market for days, weeks or months.
  2. You feel more confident than usual.
  3. You appear willing to take more risks than usual.
  4. Your ego is at elevated levels, and you’re telling yourself how brilliant you are.
  5. You think you know exactly what the market is going to do every time.

If you are finding yourself currently in any 5 of those stages and you have less than 10 years experience trading, I can say you are in a very dangerous mindset and self implosion is only a step away.

Do yourself a favour: take a break

So the best, and most tried and tested method, is to take a break when you’re doing well. Let the swelled head or ego dissipate, acknowledge you have been very lucky and done well but ultimately you’re at the most dangerous time when self-sabotage occurs most commonly.

My final piece of advice when you find yourself trading on a high? Surround yourself with grounded and humble people who aren’t traders. Remind yourself of the diligent and hard working person you once were who studied hard to become profitable, and remind yourself that being humble is now not only necessary, but more important than ever.

And always remember: be mindful of winning streaks. After all, the reason they’re called winning streaks is because they’re usually followed by losing ones.

Read more from Nathan Batchelor’s Trading Psychology Series here

Want to put any questions to Nathan? Email him at nathan@littlefishfx.com, while you can find him in our Live Trading Room every day of the week – sign up for 30 days free access to our Trading Hub here.