Excerpt from "TRADE MINDFULLY" by Gary Dayton
"...the trader's mind can be overly influenced by the recent experience. It is as if the trader is thinking that the recent outcome of Trade A will directly affect the outcome of future Trade B. We know, or should know, that this isn't true. Each trade is independent of every other trade. Trade A does not influence Trade B, yet we act as if there is a relationship because of this cognitive error. Trader behaviors becomes a function of the recency effect - a mental blind spot."
Traders go through mental blind spot from time to time. It comes with winnings and also with losses. If you have a decent number of wins in a row, you will think the next trade(s) should be a win too. This is where overconfidence comes in, and you totally become blind to your own mistakes. The same thing goes for losses, but instead of overconfidence, fear and panic set in. What if I lose the next trade? You keep wondering whether the next trade is worth it or not. This is a mental blind spot and for traders to overcome this mental state, traders need to treat each trade separately. The next trade you are taking has nothing to do with the last trade you took. Each trade is independent of the other, and the earlier you do this, the easier the journey becomes.
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