The Bank of International Settlements reports that the daily trade volume on the leading financial market in the world, Forex, has been increasing dramatically since about 2016. Naturally, major financial institutions account for a sizable portion of the industry, but they are not the sole factor driving it ahead. Apart from financial specialists, technology has enabled online trading platforms to flourish, leading ordinary people to start trading periodically out of a desire to increase their income. There are currently more than 9.5 million online traders worldwide. While the action is still primarily concentrated in the hotspots of New York and London, other regions are also starting to emerge, particularly in Asia and the Middle East.
We can now spot substantial changes in the picture of the current trader compared to a few decades ago. A modern trader is more likely to be in their mid-twenties, get their knowledge from internet sources, read UFX review, and utilize a range of modern technologies to trade compared to the traders of the 1990s, who were individuals in their 50s or 60s with a finance degree and experience in finance organizations. These contemporary merchants all share the desire to increase their income by utilizing technology.
However, the outcomes frequently fall short of expectations. Trading is challenging even with lower entry barriers. According to statistics, 80 percent of traders lose money, 10 percent break even, and only 10 percent consistently make money. Given these figures, it is hardly surprising that 75% of day traders quit in less than two years. To many people’s surprises, there are a number of reasons why so many traders lose money, but the main one has nothing to do with the volatility of the financial markets. In reality, it has a psychological component.
What is Random Reinforcement?
When you link a random event to ability or lack thereof in trade, random reinforcement takes place. Beginners are more likely than professionals to fall victim to random reinforcement, and when they make their initial trades, they frequently mistake intuition for unsystematic results (or lack thereof).
The situation of the market is not arbitrary in the long run. If you learn to analyse the political and economic events that affect it, it will not seem as volatile. However, the market may experience brief changes that appear to be quite perplexing. These variations can occasionally reward bad trading habits while punishing good ones, which can cause overconfidence or confidence loss.
How can random reinforcement affect your trading?
For instance, a novice trader may succeed in a few transactions without having a sound strategy because they think they are naturally skilled, feel overconfident, and proceed to trade in the same manner. However, in the long run, this kind of random reinforcement is extremely risky because it mimics gambling and will ultimately result in losses.
The opposite is also true: a trader with a strategy and thorough research may lose trade after trade due to an uncontrollable circumstance, feel they have lost their edge, and give up. Random reinforcement, a significant psychological component that might influence your trading experience, should not be undervalued because it can encourage negative behaviours that are challenging to break. Over time, random reinforcement may lead you to believe that you are improving when, in fact, you are only making random trades, or that you are deteriorating when, in fact, your losses are just modest, natural fluctuations.
Randomness in trading might result in streaks of losses or streaks of gains. Random reinforcement refers to the association of a result with skill or lack of competence rather than the actual cause of it. And there are three reasons why that is risky:
- It produces a false impression of your trading abilities (both overconfidence and low confidence are major mental factors that can impact the trading consequence).
- It causes you to construct shoddy trading plans, give up on your trading plan, and trade at random.
- It causes you to distrust reliable information sources in favour of unproven techniques.
How to avoid random reinforcement?
The major question is: how can you avoid tumbling into the trap of random reinforcement now that we have uncovered the primary psychological barrier to successful trading? Whether you are a novice or an expert, you could be tempted to focus too much on chance. The best approach to combat this inclination is to make an investment in your knowledge.
A seasoned trader is constantly learning new things. By learning the fundamental and technical analysis trading principles, you will comprehend all the factors that affect how the market moves and be able to develop trading strategies that are founded on actual data rather than speculation and luck. Trading becomes a precise, analytical activity where you plan every move and do not leave anything to chance when you have a clear picture of the market. Contrary to popular assumption, building a strong knowledge foundation does not need a lot of effort or cash. You can always use tools like The Robust Trader to find answers to all your trading concerns and understand how the market functions, so you do not need to get a degree in finance or sign up for pricey classes.
Maintaining a well-thought-out trading strategy based on your objectives and preferred risk level will help you avoid the pitfalls of random reinforcement. Knowledge and expertise are essential for becoming a successful trader, but they are meaningless without consistency. Even while it is entirely feasible to succeed as a trader without any prior experience, this process takes time. Your best bet is to invest in your studies and make a commitment to trading because you do not become a millionaire overnight, and there are no undiscovered fast cuts. Do not give up after the first month without giving your approach time to work because it often takes between two and five years to understand how the market really operates and see the rewards of your efforts.
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