Category: Trading psychology

Let’s start with a simple analogy. When you put the wrong tires on your car, you increase the risk of accidents. Tire problems account for thousands of crashes, more than view obstructions, fog/rain/snow, and suspension combined. Improper tires also reduce the performance quality of the car and lead to incorrect dashboard readings. The same is true for trading performance. 

Having the “correct fit” of your trading strategies is essential. And just like with tires, an “ill fit” can have a devastating effect. This article will share tips on how to prevent it.  

1. Define your attitude about the markets and about yourself

Your attitude impacts your general outlook on life, as well as your trading process. So, you need to understand how you’ll approach the markets and with what kind of attitude. 

These are some questions that will help you learn more about yourself:

• Will trading become your full-time job? If so, how committed are you to making trading a career? 
• If not, do you want to trade on a part-time basis? 
• How confident are you in your abilities? Do you have a positive, optimistic attitude toward yourself?
• How do you behave when confronted with obstacles, achievements, victories, or defeats? 

2. Change your asset selection process

Asset selection is where many traders mess up. Instead of choosing assets that make sense for them, they choose those that everyone else is trading. That leads to traders buying assets they know nothing about. If you specialize in stocks, don’t switch to complex derivatives like currency swaps unless you fully understand them (and know that they are right for you). 

3. Trade on other timeframes

The “right” timeframe mainly depends on the kind of trading you want to do. If you don’t feel that you’ve found your perfect trading pace, experiment with different timeframes. 

If you have the mindset of an active trader, consider low timeframes. Traders who choose 1-minute to 15-minute charts feel very comfortable identifying small price fluctuations multiple times during a trading session. You may find yourself in the opposite scenario, gravitating toward a longer style. 

In any case, try out different charts to see what kind of trading speed suits you more. 

4. Pick strategies that match your risk tolerance

Your trading mindset is also dictated by the level of risk you’re able and willing to accept. In general, you will fall under one of the following categories: 

• Risk-intolerant traders
• Confident traders
• Loss-averse young traders
• Conservative long-term investors

The next step is to translate your risk tolerance into a trading strategy. Once you know where you fall along the risk spectrum, compare strategies based on their risk and return ratios. Make sure to also take into account your goals and time horizon.

5. Get in the right headspace

The capacity to think clearly, without interference is as important as your general mindset. Without a healthy headspace, even in stress-inducing financial markets, you simply won’t be as productive as you need to be. 

Develop some personal coping strategies to look through the clutter, avoid the noise, and keep your focus on the strategy. 

Hope won’t change your trading mindset

“Of course, we need hope. But the one thing we need more than hope is action.”

When you know what you need to do, take action. If you spend a lot of time analyzing your next move without doing anything, you’ll be nowhere near your proper trading mindset. Be willing to make a move, even if it won’t yield immediate results. Think of it this way:  trying to change your mindset without being 100% certain about a particular decision is one of the most important skills a trader can have. 

Winning mindsets aren’t innate, but they can be developed. So, don’t stress if you don’t have one—just focus on the recommendations given in this article and get to work!

There are questions that everyone has a strong opinion on…Cats or dogs? How do you pronounce GIF? Is a hot dog a sandwich? The last one was even explored in scientific literature. 

This article will be about other kinds of questions. These questions will put you on the right path and keep you away from many trading mistakes.

1. What does technical analysis tell you about the instrument?

The first (and one of the biggest) day trading mistakes is rushing through technical analysis or failing to conduct it at all. Even if you find some tools complicated or unnecessary, there are many ways to analyze technical market information. There are numerous potential variables, which give traders many opportunities to explore charts, patterns, and signals. 

Before entering a trade, it’s important to know if there is an upward, downward, or sideways trend—or no trend at all. There might be a breakout coming, which should also be considered. Technical info captures trends and momentum best.

2. What does fundamental analysis tell you about the instrument?

Next on the list of trading mistakes to avoid is failing to analyze the fundamental factors that affect the price of an asset. Specifically, you need to look at publicly-known information about the company (if you’re about to trade a stock). You can also get a lot of insight by studying historical data to check how the instrument performed in the past. 

To answer this question, you’ll need to review many elements. For example, when trading stock, consider: 

• The company’s financial statements
• The performance of competitors and the overall industry
• Press releases
• The economic and political environment

It’s always worth taking the time to stay updated on the fundamentals. 

3. Does the trade fit in your strategy?

This question will keep you from impulsive trading by reminding you of the set of trading rules you have to follow. These should clearly state what markets to trade in, when to enter into a position, when to cut losses, etc. If your planned trade meets all the criteria, go ahead. If you’re compromising the integrity of your strategy just to take this trade, hold off. 

Whether you feel excitement, anger, greed, or something else, your trading decisions should not be affected by them. Your trading strategy is there to keep you within bounds. 

4. How much are you risking on this trade?

The next on the list of the worst trading mistakes and questions to avoid them: not knowing how much you’re risking and accidentally risking too much. 

Questioning yourself about the amount you’re risking is the basis of risk management. And the ultimate reason to incorporate risk management practices is to prevent losses from getting out of control. So, this leads to a conclusion that this question can protect you from a trader’s worst nightmare—losing everything at once.

5. Do you know when to exit and take profits?

An exit strategy complements your overall trading strategy and ensures that you plan the exact conditions for closing a trade. Without these conditions, you’d leave your trading decisions to emotions and chance, which could lead you to take profits prematurely or run your losses.

If you’re about the close a position, remind yourself of the questions from above. Just like you would with an entry, you need to assess both the technicals and the fundamentals to exit. 

There are many exit strategies that fit different styles and goals. Although, one thing that should be included in whatever strategy you choose is the take-profit order. 

6. What’s your backup plan?

When trading systems fail, backup plans come to the rescue. This part of the strategy is another barrier keeping you from making emotional trading mistakes.

You can interpret this question in a couple of different ways. On a small scale, it can mean planning what you will do if a trade goes wrong. Perhaps your backup plan will be hedging. On a larger scale, you might also want to contemplate what you will do in the case of a long-term losing streak. A backup plan for this can be an entirely different strategy and an alternative source of income.

Conclusion

If you don’t want to repeat the most common trading mistakes, this set of questions should be a good start. But it’s also a good idea to look beyond! Learn from your wins and losses, see what works and what doesn’t, and add other questions to your decision-making process. 

Overall, remember that every trading decision should be deliberately planned.

Traders around the world have noticed the mysterious Binomism effect, thanks to which ordinary people can forecast the future and earn on the Binomo trading platform. Read on, and you will learn about what Binomism is and how to develop it in yourself.

What is Binomism?

Binomism is the ability to determine the near future with incredible accuracy. It can also be called a superpower because people who possess it gradually acquire the ability to influence their future, forecasting upcoming events, including ones in the financial markets.

This enigmatic effect allows people to look into the future. At the same time, Binomism has nothing to do with intuition and even more so with divination or witchcraft. Any person can have the makings of Binomoism, but this power needs to be developed.

How to awaken Binomism? 

If you think that Binomism is only available for chosen ones, we hasten to assure you that this is not so. Even a novice trader can awaken this power in himself by following three straightforward steps.

Step 1. Sign up for Binomo

To develop your Binomism, you first need to register on the Binomo platform using either of two simple ways:

1. Enter your email address and create a strong password.
2. Login via Google/Facebook account.

Be careful when choosing a currency. If you decide to change your selection, you must close your account and create a new one with the desired currency because having multiple accounts is prohibited by Binomo policy. This and other rules for using the platform are detailed in the Client Agreement. 

Step 2. Get free training

The development of the Binomism power is impossible without learning and practice. To resolve your questions about the platform and trading, you can visit the Help Center or the FAQ section. If you have any difficulties, write to the chatbot Cody or managers by email at [email protected].

When you first log in to the Binomo platform, you will also get access to pop-up tips, video tutorials, and a demo account with unlimited virtual currency. The free account can be called the primary tool for developing your Binomism, as it helps to consolidate the ability to forecast price movements on real charts. At the same time, the risk of losing your funds is excluded since the virtual balance can be replenished unlimitedly.

Step 3: Start making deposits

When you feel ready for real trading, make your first deposit on Binomo.

The minimum amount to replenish an account is only $10 ($5 for India), and the trade entry threshold is only $1.

The more you trade, the better you will develop your Binomism, which means you can get even more profit from correct forecasts. Therefore, a one-time investment is considered less effective than regular investments.

Unleash your Binomism and become a superhero

The trading platform has provided everything you need to awaken your Binomism and start earning with correct forecasts.

Join millions of Binomo traders with promo code TRY_BINOMISMO and get +150% on your first deposit!

Hurry, as it’s only valid until September 30.

 Do not forget that trading involves the risk of losing investment, which can only be minimized by training and practice.

So let’s start and may the Binomism force be with you!

Taking a close look at the market trends, you will almost immediately realize it has a low barrier to entry. This makes it very accessible and flexible. Having a PC and a steady internet connection, backed by a few hundred dollars should set you up for trading.

However, having an easy-entry protocol doesn’t guarantee maximum success as a trader. Without any further ado, let us consider what makes a bad trader by looking at the 5 simple mistakes you should try to avoid as you continue in your trading adventure.

1. Trading after continuous loss – Not paying attention to statistics

One of the qualities of a bad trader is to keep trading while at a loss. There are two statistics for you to keep an eye on while day trading. They are your risk-reward and value-rate ratio.

Your risk-reward ratio on an average trade is determined by how much value you make and how much you lose. If, for example, the average value made from your trade is $100 and the value lost is $75, your risk-reward ratio will be:$100/$75 = 1.3

Having a risk-reward ratio of 1 or below implies losing on a high scale. Thus, it is essential to keep your balance above 1.

On the other hand, your value-rate ratio is calculated as the percentage of good trades. Scoring 70 works out of a hundred, for example, will give you a 70% value rate.

As a trader, you notice your risk-reward ratio is constantly falling below 1, and your value rate is nowhere near 50%; you should take a break and restrategize.

2. Trading without setting a stop loss

Every trader should incorporate the habit of having a stop loss on their trade. A stop-loss ejects you from the transaction once the price movement reaches a set amount against your prediction. Trading without a stop loss is like setting out without a navigational system to protect you from wandering in the wild. 

Having a stop-loss order on every of your trades removes the scariest part out of the way. The stop-loss order does not prevent you from losing when your prediction goes wrong but ensures you do not lose more than you can bear.

3. Placing additional order to a losing trade

The practice of averaging down involves you adding to your position on the market when you notice the price is moving against you. A good number of traders do this in the hope that there will be a reversal in the trend.

It is in your best interest to know that adding to a losing trade may be a bad decision. Instead, set a stop loss to keep you from losing more than expected without having to risk more.

4. Risking it all

An essential part of trading is knowing how to manage your risk level. Ideally, on a single trade, a good trader should only take a risk that is less than 1% of their money. This implies that a stop-loss order should close the trade once the loss hits 1% of the money.

However, some traders prefer to risk more than they can bear, resulting in an exponential loss. Another aspect is having a set amount of losing percentage for the week. Say you decide to stop trading for the week once the losing rate reaches 3%; you can properly manage your capital.

5. Attempting to get everything back – Going all out

Going all out to recoup lost trades is unique among the qualities of a bad trader. A proper risk management strategy alone does not save you from becoming a lousy trader. Times will come as a trader when you are tempted to trade more extensively than you would on a good day.

You must understand that trading involves strategy and you have to be dynamic. Ensure you do not place a trade with the mindset of getting back all that you have lost; otherwise, you may lose everything.

A final note

Now you fully understand what makes a bad trader, and we hope that this guide has succeeded in pointing you to the right direction to avoid simple mistakes that may not be helpful to you as a trader. 

With that said, do not forget to be calm and avoid the mistakes, highlighted above.

Ensure you get your statistics right before plunging ahead for another week’s trade. Also make sure that you set in place a proper structure to accommodate your trade.

Using a demo trading account and thinking about going live? Read on for the six signs you no longer need demo trading. 

You’re constant

Being consistently profitable is the first sign that you’re ready to progress from a demo trading account. Consistent profitability indicates that you have a statistical edge in the market; it signals that you know how to find high-probability setups and manage your risk effectively. 

But what does consistently being constant look like? Well, aim to double or triple your demo trading account balance. After all, that’s what you’d aim to do once you’re trading live. You should, over hundreds of trades, be able to confirm that your trading balance is growing. It’s okay to have a few blips here and there, but overall, the trend should be up.

You’re sticking to your plan

Sticking to a plan is key to becoming a pro trader. With demo trading, it’s easy to think that the money isn’t real, so it doesn’t matter if you enter and exit trades on a whim. This only cements bad habits that will ruin your trades in the long run.

Instead, you should have systematized rules to identify what you like to see before entering a trade. It should be easy to justify why you’re looking to get in or out at a particular price. Knowing where and when you should exit a trade is vital, and sticking to these targets once you’ve set them should be the standard for you. 

You employ proper risk management constantly 

Effective risk management is a cornerstone of every good trader’s skillset. There will be times when trading just doesn’t go your way: whether it’s a confusing market or you’re struggling psychologically, risk management is the only way to weather the storm successfully. 

You should have clear risk management rules that you follow constantly. It could be that after three consecutive losers, you stop trading for the day or never risk more than 3% of your account balance on a trade. Either way, effective risk management will be essential in your trades, so it’s important to dial it in early.

You’ve identified and have made progress with your trading demons

With a free demo trading account, overlooking your demons is all too common. Demons are negative psychological traits that impact your trading. It could be that you often FOMO into trades or deviate from your plan too much. Or maybe your entries keep getting stopped out before price moves in the direction you anticipated.

Whatever it is, we all have aspects of our trading that we could improve. The important thing is to identify what’s hurting your margins and mitigate it as much as possible. The issue doesn’t have to be fixed entirely; we all make mistakes from time to time. But, you should be making significant progress before moving on from demo trading. 

You’ve traded in multiple markets, across multiple market structures

Some traders prefer to trade one or two markets, while some watch dozens at a time. It’s all down to preference. But, you must have enough screen time across different markets and structures. Not only will you find common patterns, but you’ll also be able to prove that you have an edge that can be applied to multiple markets.

If you’ve only been successful trading EUR/USD in a bull market, for example, you might struggle with a more volatile pair like GBP/JPY during a bear market. Market characteristics and structures constantly shift, so having a broad experience is essential in the long run.

You have enough saved to invest comfortably

Finally, there’s no use moving from a demo trading to a live account if you don’t have enough to invest in your trades. You should never take money from something more important (food, rent, bills, etc.) to trade with. Not only are these things important to your overall health and security, but trading money you can’t afford to lose is also really tough psychologically. 

You’ll miss out on good opportunities because you were so caught up in not losing your money, while chasing losses because you need to win that money back. That isn’t trading. 

If you can comfortably afford to potentially lose a few hundred dollars, then feel free to invest. If not, keep demo trading until you can.

Even in this day and age, there are many myths emanating from the Internet, folk wisdom, and word of mouth. For example, some of the most commonly held myths are: 

• Goldfish only have a three-second memory. 
• Bulls get angry when they see the color red.
• Humans use only 10% of their brains.
• The Great Wall of China is the only man-made structure visible from space.

None of them are true. 

If any of these misconceptions surprised you, wait until you hear these 7 myths about trading. 

Myth 1: You just buy low and sell high

Buying low and selling high is the basic strategy every trader starts with. It’s a simple, tried and tested approach, but it’s not everything your trading activity has to come down to. Besides, you can’t apply the buy low/sell high strategy in many market conditions. 

To grow trading into something more serious, you need to branch out from the basics. What about buying high and selling higher? You can catch the market when its momentum is in full swing. Or what about the numerous other strategies out there? You can trade based on patterns, breakouts, and reversals, apply oscillators and moving averages, and do a lot more.

Myth 2: Greater leverage = greater returns

One of the more common myths about Forex trading is that leverage is always worth it. Too many resources focus on the good sides of leverage, barely covering the downsides. Many resources ignore that you risk magnifying your losses with borrowed funds. 

In truth, the more potentially profitable a position is made, the riskier. Leverage is a double-edged sword that shouldn’t be applied thoughtlessly. You can even lose more than you initially deposited. So, the next time you want to increase your position size through leverage, double-check with your risk management strategy. 

Myth 3: You have to trade without emotions

Time and time again, traders have been told to keep their emotions in check. And yes, it is essential—negative repercussions in trading when you let your emotion take over reason. But no one can blame you for being stressed when your positions are performing poorly. Similarly, you can’t help but get excited or frustrated.

Mastering trading psychology simply dictates that you mustn’t let emotions affect your decisions. No one is telling you to fight your human nature and force yourself to feel nothing. It’s normal to feel positive and negative emotions because the trading journey is full of ups and downs!

Myth 4: Stocks are the safest alternative 

When times are uncertain, people tend to load up on stocks that are household names. But it’s not always the safest; in some cases, putting your capital primarily in stock is not safe at all. The perceived stability of the stock market is one of the stock trading myths. 

The better way to lower market risk is to have diversity. You can go for bonds, real estate, commodities, currencies, and cryptocurrencies, among other assets. The composition of your assets will depend on your goals and risk appetite. 

Myth 5: Higher timeframes are easier

Higher timeframes are not easier to trade, just like lower timeframes are not harder. It’s a matter of personal preference. Some will find high timeframes incredibly hard to trade if they don’t have the skillset or the experience for it. Others will find that low timeframes are too detailed and quick to handle. 

You don’t have to choose one or the other. Depending on your chosen assets and strategies, you will find yourself trading on different timeframes. Sometimes, you’ll need two charts for one trade. For example, you can scalp on a 15-minute timeframe while also looking at the 1-day chart to track the overall trend.

Myth 6: You should sell when the market’s in trouble

This might be one of the most popular crypto trading myths. When cryptocurrencies were down following the 2018 crash, traders launched a massive sell-off and realized their losses. Fast-forward to 2021-2022, crypto entered a long-term bull-run, with some coins growing by 1,000% and more. 

This is a clear example of waiting until the market recovers and recouping your unrealized returns. The same happens in other markets, too. Famously, the stock market tends to recover after each recession.

Myth 7: Screentime will help you become better

Observing the market will not make you a better trader. You wouldn’t expect a football player to improve their skill by looking at the field. What will make you better is practice, preparation, and analysis. 

Don’t waste your time increasing your screentime without putting in the action. Have a plan, use multiple charts, apply indicators, open trades based on your trade setup, and monitor them. After closing the position, review your trades and take a note of what worked and what didn’t. 

Summary

It’s said that all myths are born from a nugget of truth. Perhaps some of these day trading myths carry a bit of wisdom, but not enough to make them good trading recommendations. 

With the rising popularity of trading, there seems to be an overwhelming amount of information. So, take your time to do research and double-check any advice coming your way.

Character traits are a fascinating topic to explore. Did you know that being a “dog person” or a “cat person” can reveal important information about your personality? Researchers discovered that dog people are more extroverted and eager to please others, while cat people are more introverted and curious. Does it mean that cat people make better traders? Researchers are silent about that. 

However, there is a set of traits that you can see in all successful traders – let’s discuss each one.

1. Discipline

Discipline helps you get things done. There won’t be a boss or manager pushing you to stay on task or commit to intensive after-hours research. When there’s no one watching, you’ll still need to push yourself to new heights.

2. Mental strength

Everyone possesses mental strength to some degree. But the stronger (or, as some say, the thicker-skinned) you are, the more likely you are to achieve trading success. 

You need mental strength because it can help you to: 

• Filter out unhelpful opinions
• Bounce back from failure
• Have the courage to face your fears
• Keep your emotions under control
• Maintain a high sense of self-worth

3. Adaptability 

No two trading days are exactly the same. So, every time you start a trading session, you need to be prepared for a new set of circumstances. Obviously, you can’t prepare for every possible situation, which is where your adaptability will come into play. 

4. Decisiveness

Decisiveness comes hand-in-hand with adaptability. As soon as the market changes, you need to adapt your strategy, and you need to do it quickly. 

This doesn’t mean you should rush your trades. Trading mastery lies in the ability to gather information and analyze it without delaying your decision. Professional traders can draw on past experiences to read new situations in a matter of minutes, leaving no room for second-guessing.

5. Independence 

Independent people naturally tend to be a little more confident, which helps with the character discussed above. 

On top of not needing support or permission from someone else, independent people are known for their productivity. They are great solo players, and a team of colleagues would simply drag them down. And if something goes wrong, a self-reliant trader will handle their own situations.

How to adopt traits of a good trader

“Your mind is like a garden. If you do not deliberately plant flowers and tend them carefully, weeds will grow without any encouragement at all.”

Brian Tracy

You can probably guess that simply wishing yourself a new, improved personality won’t work. But what is proven to work is actively engaging in behaviors designed to change one’s personality. 

Here is what you can do:

• Challenge your self-beliefs and stop labeling yourself. 
• Practice new habits until they become second nature.
• Tell someone who can hold you accountable.
• Focus on one trait from the list at a time. 
• Put yourself in situations that force you to practice these traits. 

What are the traits of a successful person? Researchers found that extroversion, conscientiousness, and emotional stability have the strongest effects on a person’s career development. But they didn’t measure one thing—laziness. 

It can be hard to believe that laziness is one of the most important qualities of a successful trader because it’s always looked down on. This article will show you the hidden, productive side of laziness and explain why it makes trading better.

1. You’re not glued to the charts 

“You need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on regrets and wishful thinking”

Trading for a Living, Alexander Elder

Successful traders don’t bother monitoring the charts all the time because being stuck in front of the monitor accomplishes nothing. They understand that there is no reason to know where the asset is moving unless there is a favorable trade setup. They analyze the market only when they need to.

They check their account in the morning, set up their orders/signals, and return to the computer when alerted. Of course, the routine may be slightly different, but the main point is the same—set your signals and give your trading edge a fair shot to play out.

This approach not only saves time but also frees your trading activity from unnecessary stress.

2. You don’t overtrade 

Lazy traders know how to deal with emotions that cause overtrading, such as:

• The fear that makes people chase their losses
• The excitement that tempts traders to open positions without analysis
• The greed that creates the obsession over possessing capital

Perhaps you don’t have the time and passion to trade more. You’re content with the trades you have. When you close a position, you open another one, without entering more “just in case.” 

3. You count on big winners

Many traders believe in The Pareto principle— the 80/20 rule. It says that 80% of your results come from 20% of your actions. That combines both a lazy and smart attitude to trading. If you look around, this rule works everywhere— 80% of sales come from 20% of customers, 80% of decisions in a meeting are made in 20% of the time, and 20% of drivers cause 80% of all traffic accidents. 

So, there is a high chance that 20% of your trades will generate 80% of your returns. As a lazy successful trader, this arrangement works perfectly well for you.

4. You have confidence 

Lazy people don’t live under constant pressure. They don’t have the energy to doubt themselves, they’d rather be doing something else. That is something that overachievers can take note of. 

There is even research that confirms procrastinating away from work and spending unproductive time can be good for your mental health.

5. You have your priorities straight

“I choose a lazy person to do a hard job. Because a lazy person will find an easy way to do it.”

Bill Gates

Because lazy people want to carefully manage how much energy they exert, they tend to avoid unnecessary tasks. They know that it’s better to trade well than to trade more. That is also why successful traders’ strategies focus on giving minimum input and receiving the outsized output. 

Lastly, laziness gives you an opportunity to recharge your body and mind, thus avoiding burnout.

How to develop positive trading habits as a lazy trader

Lazy traders need rules, too. If you’re one of them, here are the most important points to develop the right trading mindset: 

• Your trading setup should fit on one page. Make sure all your planned activities for the day fit on one page. A routine on multiple sheets of paper is no use for a lazy trader.
• Expect failed attempts. It’s hard to figure everything out on your first, second, or third try. Don’t be discouraged by false expectations and just carry on making small trades. 
• Find your niche. Consider specializing and focusing on what works well for you. This way, there is little chance of your strategy mismatching your personality and trading style.
• Stick to your trading strategy. Instead of hopping from strategy to strategy, give one strategy the time to show what it’s capable of. 
• Balance life outside of trading. No matter how early you want to get in on the action, it’s not a good idea to be sitting at 4 a.m. watching where the Yen will move. 

Now that you know more about how to become a successful trader, it’s time to put your lazy yet productive attitude to good use!

All traders have been there: they’ve found an excellent setup then entered their trade before the price then goes against them and they buy yet more because they have the belief that the price will go up eventually. And, when that price keeps going down, they keep on buying more until they’re left with huge losses and have to close. Sounds familiar? 

So, why do we do it? 

Now we’ll be discussing why trading failures are in our very nature – and importantly, how we can stop it!

The human brain isn’t meant to trade

The reason why we do such destructive things is down to a mechanism called ‘cognitive dissonance’. This is our internal shield designed to control how we act and live. Essentially, with cognitive dissonance, we’re experiencing discomfort or conflict due to our own actions. 

One good example is that of smokers when reaching for their cigarettes. They’ll know 100% that smoking increases their cancer risks, but they won’t think of this each time they reach for a nicotine fix. This is because when we experience a negative emotion, we start to change our thoughts and behaviours in order to reduce our discomfort. Instead of giving up the cigarettes, they’ll use avoidance tactics. 

How this applies to trading

When we take the smoking example, it’s easy to see how this phenomenon could apply to trading. 

To look into this deeper, there are two biases when it comes to cognitive dissonance. 

Either people will only notice information that seems to affirm their decision to continue trading (selective perception) or they will rationalise their actions so they stick to their plan (selective decision making). With the latter, it’s a question of ‘everyone does it’ that is used to justify the behavior. And we see this right from kindergarten.

Trading and cognitive dissonance

In trading, there are many ways in which cognitive dissonance shows up – and it can influence every layer of a trader’s decision-making. 

• Cognitive dissonance means traders will add to their losers as a sort of protection mechanism. They believe they were right in their trade idea and that the price will turn soon so they should continue to buy while it’s cheap. 
• When a trader only analyses one side of the market, they’ll be convinced about where prices will be going. Thus, they won’t be able to see how they could be wrong. 
• When traders discuss positions and trades openly, they’re much more likely to try justifying their bad trades and defending their losses, making them stick with them longer. 
• When money is still being lost further down the line, traders will still convince themselves that it’s a learning experience.
• When traders try to think of excuses for breaking their entry rules and chasing prices. 
• When traders don’t look for the wider picture.

Can you reduce cognitive dissonance with trading?

Unfortunately, there isn’t a quick fix that will turn off the nature that is cognitive dissonance. This is something the human race has developed over thousands of years. However, there are things a trader can do to help them with making better decisions. 

1. Never talk about – or justify – trades to another person. Talking about trades means involving our ego and traders won’t want to show they’ve got a losing trade. When amateur traders talk about their trades, it means they will be more likely to stick with it as they’ll talk themselves into it.
2. Have both short-term and long-term trading plans. Also, make sure you look at all sides of the market and not to convince you of something that is not true
3. Have a journal. This will help raise your awareness of your behaviors around trades. Tracking what you do and when means you’re less likely to repeat mistakes. 
4. Understand that you will never know all there is to know about trading and that you will have losses. When traders can’t take losses well, they have little chance of ever doing trading full-time.
5. When deciding to take a trade, talk to yourself out loud as though you are explaining what you’re doing to someone else. This might seem silly, but you’ll be able to tell whether or not your plan makes sense.

Final thoughts

The human brain is a master of trickery. Understanding cognitive dissonance and being aware of how it can manipulate behavior is the first step in controlling how we trade. This is crucial for maintaining objective assessments of our abilities and performance as a trader. Without this awareness, we really are our own worst enemies!

Pivot points (PP) are an effective indicator used by many traders. Although they are calculated automatically, you can measure them by hand. There are four main types of indicators, and other types are being developed. Unlike other indicators, every type of PP was developed by different analysts. Only one name is known: Nicolas Scott developed Camarilla pivot points in the 1980s.  

Pivot points in trading

The pivot point indicator predicts support and resistance levels in the current or upcoming session. 

The standard indicator consists of five lines:

• A pivot point (PP) stands for the middle line and determines the overall trend.
• Two levels above it (R1 and R2) reflect the resistance levels. 
• Two levels below it (S1 and S2) stand for support levels. 

These levels are calculated based on the previous trading day’s high, low, and close prices. 

Pivot Point (PP) = (Maximum + Minimum + Close)/3

Support 1 (S1) = (PP x 2) – Previous Maximum

Support 2 (S2) = PP – (Previous Maximum – Previous Minimum)

Resistance 1 (R1) = (PP x 2) – Previous Minimum

Resistance 2 (R2) = PP + (Previous Maximum – Previous Minimum)

If the price is above the pivot point, it’s likely to reach the first resistance level. If it’s broken, the next resistance will become a target. Vice versa, two support levels will become targets for upcoming price movements when the price falls below the pivot point. 

Pivot points: types

There are four types of pivot point indicators. The standard one was discussed above. The other three types are:

1. Woodie pivot point

It adds more weight to the closing price.

Calculation: 

R2 = PP + Maximum – Minimum

R1 = (2 X PP) – Minimum

PP = (Maximum + Minimum + 2Close) / 4

S1 = (2 X PP) – Maximum

S2 = PP – Maximum + Minimum

2. Camarilla pivot point

Camarilla pivot points also put more weight on the closing price, but there are nine levels – a pivot, four resistance, and four support levels. 

Calculation:

R4 = Close + ((Maximum – Minimum) x 1.5000)

R3 = Close + ((Maximum – Minimum) x 1.2500)

R2 = Close + ((Maximum – Minimum) x 1.1666)

R1 = Close + (Maximum – Minimum) x 1.0833)

PP = (H + L + C) / 3

S1 = Close – ((Maximum – Minimum) x 1.0833)

S2 = Close – ((Maximum – Minimum) x 1.1666)

S3 = Close – ((Maximum – Minimum) x 1.2500)

S4 = Close – ((Maximum – Minimum) x 1.5000)

3. Fibonacci pivot point

This type uses Fibo levels for the calculation of support and resistance targets.

R3 = PP + ((Maximum – Minimum) x 1.000)

R2 = PP + ((Maximum – Minimum) x 0.618)

R1 = PP + ((Maximum – Minimum) x 0.382)

PP = (H + L + C) / 3

S1 = PP – ((Maximum – Minimum) x 0.382)

S2 = PP – ((Maximum – Minimum) x 0.618)

S3 = PP – ((Maximum – Minimum) x 1.000)

How to use pivot points in trading

Pivots are applied to various assets and timeframes. Pivot points can be daily, weekly, monthly, or yearly. The levels change depending on the period you choose. 

For example, if it is Tuesday morning, daily pivots will be calculated using high, low, and close asset prices set on Monday. 

When learning how to use pivot points in day trading, you may be confused. However, the names of pivots don’t correlate with the timeframes they are used on. For example, you should apply daily pivots to trade on timeframes up to 30-minutes. You should use weekly pivots to trade on hourly, 4-hour, and daily charts. The weekly levels are changed only once a week and are calculated on the previous week’s high, low, and close prices. 

When trading on a weekly timeframe, you should use monthly pivots. They are built on the previous month’s data. If you plan to hold a position for months, you should use yearly pivots. It uses the high, low, and close of the previous year.

How to calculate pivot points

When you add a pivot point indicator to your chart, there will be an automatic calculation of the levels. However, you can also calculate levels manually if necessary. Before doing so, you should remember that pivot points are based on the previous trading day’s high, low, and close, and they are mainly used by day traders.

So, if it’s a Tuesday morning, you can use the high, low, and close from Monday, making the pivot point levels for the Tuesday trading day.

1. Look for the high and low of the day either before the market closing or the market opening the following day. Also, check the most recent trading day’s close.

2. Take the high, low, and close, add them up, then divide them by three.

3. Next, use “P” to mark the price on the chart.

4. As you discover the P, calculate the R1, R2, S1, and S2. In the calculations, the high and low will be from the previous trading day.

Here are the calculation formulas so it’s easier to obtain the pivot points:

·  Pivot point (PP) = (High + Low + Close) / 3

Then, here’s how to calculate first and second-level resistance:

·  First resistance (R1) = (2 x PP) – Low

·  Second resistance (R2) = PP + (High – Low)

Lastly, here is how you calculate first and second-level support:

·  First support (S1) = (2 x PP) – High

·  Second support (S2) = PP – (High – Low)

What do pivot points tell you?

Pivot points are used for commodities, stocks, and futures as intraday indicators. They do not change in price as the day progresses. This allows traders to develop a better trading strategy while taking advantage of the price levels.

Many traders are aware of the fact that they will be buying when the price exceeds the pivot point, and they will be short-selling when it goes below the pivot point.

As part of their trading plan, traders tend to mix pivot points with different other trend indicators. Pivot points can become way stronger resistance or support levels when they overlap with 50-period or 200-period Fibonacci extension or moving average levels.

Day trading with pivot points

Pivot points are commonly used by day traders to calculate levels of stops, profit-taking, and entry. You can perform trend analysis in multiple ways using pivot points. When you’re analyzing trends, they will simply tell what’s going on in a mechanical way.

Pivot points can be applied to shorter amounts of time considering they offer data from one trading day, which makes them more convenient.

They are easy to use, and the good news is that the indicator is available on most trading platforms. Pivot points also provide a lot of data, and they represent one of the most accurate tools in trading.

It’s not hard to use pivot points in day trading. When the opening price of a stock is lower than the Basic Pivot Level, it points toward a bearish bias. But if the opening price is higher than the PP, it indicates a bullish bias. In case R1 is bypassed, you can set your target at R2 and purchase the stock.

Pivot level breakout and pivot point bounce are the most common strategies that traders use when trading with pivot points.

Pivot points: pitfalls

Some pitfalls should be considered to use the indicator effectively. 

• Static. Unlike most indicators, including moving averages and oscillators, pivots change only at the beginning of the next day. It’s dangerous for trading decisions when volatility is high. 
• No 100% accuracy. There is no indicator that will provide fully accurate levels to enter and exit the market. Therefore, you should combine some technical tools to forecast price movements effectively. For example, the level becomes even stronger if any of the pivots overlap or converge with a moving average or Fibonacci extension level. 

Takeaway

The pivot points indicator provides accurate levels that intraday traders mostly use. Although they are broken often, the breakout is short, and the price turns around eventually.