Top Three Ways to Avoid Yo-yo Trades

We call it a cycle because the trader is stuck in a loop of winning back the money he or she continuously loses and then gains back again. These results for more loss than gain because of the fact that you stay in the same level despite expending your resources of knowledge, time, and energy.

The Yo-yo trading experience can be likened to someone taking a diet, or vowing to stick to a new year’s resolution, or committing to a relationship. Sometimes you get results that motivate you but in the end can be the very reason you are stuck in a diet regimen, a commitment, or a relationship, and a trade cycle that is simple not working anymore. This is common for people new to this in the stock markets. A person’s tendency to get addicted to that winning sensation is similar to the people getting addicted to gambling, drugs, alcohol etc. Of course, it’s not as serious.

So before you lose all your money trying to get back that winning feeling, get out of that yo-yo cycle using these three easy steps.

1. Be Humble

The root of any financial market mistake is basing trading decisions on emotions. So the key is to not be overconfident. While you believe that your winning strategy could work again after it successfully conquered in the trades in a previous event, waiting for it to work again after a slew of following losses kind of defeats the purpose. Move on. Create a new trading strategy and keep adapting to every market change.

2. Reject Recency Bias

Recency bias is people’s inclination to be affected by recent market events, trades, and news. This leads to the neglection of crucial information. In short, people only see what they want to see. This spells trouble in the world of trading. To battle this, you must always detach yourself from all your recent trades and to not put any sentimental value over any of them. Get rid of recency bias by keeping your focus on the big picture, sticking to your long-term plan, and keeping track of your trading history.

3. Control Your Emotions

Basically, don’t let your emotions take control of you. When you win the trade, accept your profits and keep moving. When you lose, don’t take it to heart and still keep moving. What you win or lose in a single trade does not equal your self-worth as a trader. What matters is that in the long run, you are a winner who traded smartly.

Avoid getting in the yo-yo cycle and you’ll avoid spiralling out of the trading game.