Before we start discussing all the strategies to avoid getting stuck in a trading yo-yo, it would be reasonable to get done with defining it firstly. You may understand a trading yo-yo as simply earning consistent profits from binary options or Forex trade markets for a limited duration of time.
What is it all about?
The ‘yo-yo’ cycle functions as a deceptive and maladaptive loop; so, once the profit starts coming in, the trader is more likely to become overconfident and reckless. But, what does this mean in a trading scenario? Well, the more overconfident you get (as a trader), the less time you spend on making critical decisions during performing a specific action; this ultimately results in a swift downward spiral. Consequently, the trader faces recurrent loss because of careless decision making or weak strategy.
This trade-yo-yo happens to be a rather vicious cycle and mostly, the traders would make a great deal of effort to get back on track and start executing the trading activities carefully. But the old habits are often hard to let go; and most traders would easily slip back into the same patterns. The traders regain the confidence, profits and may become overconfident again, thus pressing a reverse for everything.
This principle of repeated loops of upward and downward trends is something that every trader has experienced, and it seems like an unavoidable fate. However, with a little bit of vigilance and perseverance, it can be avoided easily. This principle is prevalent in various routine activities that may include following a diet plan or training for something or building a social network and maintaining it, etc. The common error that traders, usually, commit is that they let the immediate results take over their decision-making capacity and it works both ways. Whether you are making big profits or suffering a loss; trade sector is all about staying in control of your nerves. Below are few tips that may help you avoid this vicious trap of maladaptive trade habits.
1. Stay Away from Recency Bias
In simple terms, the fact that traders tend to get influenced by the results of very recent trades or events, while ignoring all the previous trade-history is called recency bias. Now, this error is one of the most critical, because the past trade information that the trader often ignores should be regarded as significant because it can offer insights and improvement strategies.
The recency bias becomes a chronic problem if you are someone who has a habit of staying fixated on the most recent events of either losing or winning a trade. In order to keep a check on yourself, you may consider maintaining a trade journal, devise a thorough trade plan with binary options software and just follow it, focus on the bigger goal and try to avoid emotional decision making.
2. Stay Humble & Avoid Arrogance
This seems like a tip relevant to ‘teaching good manners’, however, this is vital in trade scenario as well. In trade sector, as we discussed above, the confidence and overconfidence come all too easy and it is an active choice to stay humble and rooted to the ground. Now, this does not mean that you have to doubt your trade-plan or strategy or feel diminished; rather, you need to maintain a learner mindset so are open to learning new strategies while making required amends in your existing ones.
If a trader lets go of this humility and rationality; overconfidence takes over and the trader may go for larger sized trade options that may be against the recommendations of the trading system that he is using. This may result in a never-ending vicious loop; therefore, it is vital to have control on your emotions and staying humble (even if you are winning great profit margins consistently). The best way to do this is to simply follow the trade-plan.
3. Your Trade Account does NOT define You!
Well, it is important to come to terms with the reality of Forex or binary options market; they are trade sectors and show fluctuations as a norm. So, it is important to understand that you may not be able to keep every variable in absolute control and may not be able to make a profit. In such critical situations, you would have to detach your ‘self-worth’ from the percentage of profit that you are making. Because if you let the business fluctuations dictate, how you feel about yourself, it’s going to be quite a stressful and uncertain environment for you.
One way to keep away from this pitfall is to focus on what you have achieved in other important areas of your life; this may include hobbies, workplace or family/friends. It is always a great idea to socialize more and get involved with friends and family; this helps gain a new perspective and renews enthusiasm and energy. This conducive environment will work wonders for your trade as well.
Have you ever experienced a trade-yo-yo? Share with us your experiences in the comments below.