Why Traders Give Back Profits After Winning Streaks
How many times have you hit a big winning trade or a series of winners and shortly thereafter given all the profits back and probably even more? I don’t know about you, but this scenario was one I found myself in more than once early on in my trading career, so I know just how frustrating it can be.
Continue reading to find out what I discovered about why traders give back profits and how to put an end to it once and for all…
The psychology of why you are giving back profits…
Whilst there is probably a number of reasons you are giving back your trading profits again and again, there is one thing they all have in common: Recency Effect.
Recency Effect is a psychological phenomenon that describes how people are more likely to remember and act in accordance with events that happened more recently, compared to those that came before. It sounds like it’s just human nature, and it is, but as traders, we need to understand the profound implications the recency effect has on us, if we let.
When a trader focuses too heavily on his or her most recent trading results, it causes them to lose focus and perspective. In trading, it is EXTREMELY easy to become overly-influenced by our most recent trade(s), and this can cause us to do all kinds of stupid things.
Recency Effect is the root cause of why traders give back their profits again and again. The main reason it causes traders to give back profits, is by giving them a false sense of confidence about their trading abilities…
False-confidence: An enemy in disguise
When we become overly-affected by our most recent trades (recency effect), it typically manifests itself by feeling a false sense of confidence.
For example, a beginning trader might get lucky and start out doing very well, hitting a string of three straight winners, which is entirely possible even if they don’t know what they’re doing. Now, let’s say the market conditions at the time of the winners were “easy” conditions; very strongly trending, easy to quickly profit in. Next, let’s say the market conditions change suddenly but that trader just keeps trading because they are feeling very confident following the ‘easy money’ they’ve just made. A lack of education, understanding and trading skill, combined with this false-confidence cause the trader to keep trading, but now the trader loses all the money they made on their three winners.
This type of situation is very common and nearly every trader experiences it at some point. False-confidence will make you feel like you’re smarter than you are, like you have some trading ‘gift’ that ‘other people just don’t have’. Well, you probably do not have such a gift (it’s rare), and when you are feeling like you do, it’s a warning sign you’re about to lose some money to the market.
The key to overcoming Recency Effect and false-confidence, is by remembering that thinking in probabilities is the key to lasting trading success. In other words, we are trading probabilities, not certainties in the market, and every trade is unique and independent from the previous one; so, your previous trade result has no influence on your next trade’s. This is how you have to think if you want to get in the proper trading mindset. It is when you start assigning too much importance to your more recent trades that you lose sight of your trading plan and long-term trading goals and start losing money regularly.
Cold, hard, cash.
There is nothing more real than cold, hard, cash in your hands. The feel and smell is something that creates a sensory connection and as a result, an emotional and psychological one as well. This is quite a bit different than what happens when you are simply staring at digits on a computer screen.
What is my point you ask?
When we never touch our trading money, specifically the profits we make from trades, it becomes an intangible and thus insignificant thing to us. In short, we care less about it.
What easier way to give back your trading profits than if you don’t care about them? I guarantee you if you held $500 cash in your hands and another trader walked up to you and tried grabbing it from you, you would probably punch them in the face, right? But, when that same $500 is on your computer screen and you can’t see who is taking it from you, you simply shrug and feel a little upset at the loss, and maybe chuck another $500 in your account.
Do you see the problem here?
Here’s the solution: Each month, if you made money trading, even if it was $10 profit, WITHDRAWAL SOME IF IT, and go get that amount out of an ATM or from your bank. Set that cash on your trading desk or put it in a jar where you can easily get to it. Take it out once a week, play with it, smell it, whatever. Realize that it’s REAL money and that you really don’t want to lose it! Now, trade in-line with that feeling. In other words, trade defensively, in order to preserve your trading capital, because THAT is how you survive and eventually thrive in the world of trading.
Unnecessarily giving back trading profits is probably the most frustrating part of trading and If allowed to spiral out of control, can trigger an avalanche of trading mistakes that eventually lead you to blowing out your account.
By sharing these insights it is my hope that you avoid a situation where you have grown your trading account and then proceed to lose all your profits. The mental aspect of this event can do long term damage to a traders confidence. It can be hard to recover both mentally and financially from such an event, so it’s very important traders are prepared.
After working with my students over the past decade the most common trait that I see bring down a trader is ‘over confidence’ after they experience a winning period. I encourage people to remain humble and treat each trade and each day the same as they did all those before. There is no room for egos in the market, nor is there any room for hot headed traders who feel the need to prove the market wrong, usually trading erratically to claw back losses or stubbornly holding losing positions.
Helping traders understand what problems they will run into and offering them concrete solutions on how to deal with them is something I cover in my professional trading course.
I WOULD LOVE TO HEAR YOUR COMMENTS & STORIES BELOW :)
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39 Comments Leave a Comment
Very correct…spot on…
Yes….. You are right…..
Great article indeed ,the learning never stops ,this article is really great for improving one’s trading psychology, it doesn’t really matter how long one has been trading for its always good to learn from other experienced traders such as yourself, every sunday i check your site ,i even go back to old articles. Keep up the great work!
very tru. this is the kindm of advice u can use even in ur personal day to day runnings
That was the right dose you gave
I like your psychological analysis about traders…
thank you so much… you are amazing… keep going…
Great Insight! Currently relating to this! Thanks Nial!
Brother, you are talking to me. Thank you for correcting my trading mentality. Keep up the good work
Thanks a lot, I’ve not started trading yet, but I’m learning a lot already, like I have to be humble, patient, wise and avoid over confidence. I’m certain that with your help, I’ll turn out a successful trader
Thank you very much. I am a very new trader. Yes, that over confidence is a spot on. I have one question, what about a time of trading. Is there any specific time best for trading?
Aimsy, this article on times to trade forex may assist you – https://www.learntotradethemarket.com/forex-trading-strategies/what-are-the-best-forex-currency-pairs-to-trade
This is very good article thanks Nial
Yes Nial… Thank you for pointing that out… it jerked me in my senses.. you hit it right indeed!
thanks Nial, i have the same problem your talking about but am gonna change for good since its my money.
Well done! Again!
I love this article and unfortunately i’m one of those traders that give back to the market, but that will change.
Hi, Dear Nial, Love your article, prcise and to the point, When I read your article “Take profit and run away with recency effect, I correctly examine my attitude. Thanks
I’m a brand new trader but I can see how important your advice is to me.Yes you are so right about knowing and feeling how real it is so you don’t lose it next time out of carelessness
I called you a mind reader in your last article. This time, you are at it again! I don’t know which is more frustrating, a lost trade or giving back profits? It has been plaguing my account for a while now and keeping me at almost break even! It’s a mental cycle I need to break asap, before it breaks me.
Thanks once again for sharing and reminding.
Beautiful and deep pro advise. So true and priceless
Yo! Good idea!
Good article I have been withdrawing the money since I started making money consistently I also went through a process of writing things down like a journal not for trades but more my thoughts
Wow! A lot of insights. Thank you Nial
Thanks Nial. I am learning a lot from You in trading!!!
these your Articles is talk about me all what you explain is what am going through right now,my first week of trading was very good ,mean i was doing fine but i dont what come over me ,am having bad trade infact all my trading are going against me ,am lossing my confidence in the market,i have all most blows my account.
but thank for this Article i will try and work on myself.
exactly true! Thanks for your valid article.
You are right, Nial. I have found myself in such situations several times. Thanks for bring it up.
Thank you Nial, I have realized that i’ve alot to learn…Kip up
For those that dont heed this advice. I’m ready to take your money off you. I know where your stops are. lol. ????
Thanks. This was most particular to me as I have blown my accounts more than 20 times since May, 2011. Most of these disasters came after I had grown each trading account to more than 100% profit in less than 2 weeks.
Thanks again. I will fund again and trade along your advice.
I am learning from your every articles. Today’s articles is so very interesting to withdrawal small profits like 10 dollars. Thanks very much.
Great article as usual buddy
Wonderful advice there. Withdraw the profit, smell it so that you will know how real it is before you take any other trade without proper analysis. Thanks Nial fuller.
So true !
The truth at its best.thanks Nial I needed this.
Thank you for sharing your knowledge and more…I learn a lot from you…
That’s what’s been happening to me the past few months. I hit double digits in percentage profits then give some back by the end of the month. Thanks for the insight.