The danger of error justification in trading and how to avoid it

The danger of error justification in trading and how to avoid it

Just imagine that an ideal setup for entering a trade was formed in the chart during trading hours, but suddenly you start to hesitate and do not open a position at the right time. The market moves away from the assumed entry price in the direction your predicted. The thought comes to your mind: “It’s better to enter the market with a delay than to lose this wonderful opportunity”. In the result you open a position and put your trading account to an unjustified risk trying to catch the departing train.

You made a dangerous decision in a hurry and everything started with justification of a systemless trade. Let’s consider the justification mechanism and its negative impact on your trading efficiency in more detail.

In this article:

  • Success in trading as an ability to follow a proven trading plan.
  • Rationalization of decisions to decrease or increase the number of trades.
  • Justification of staying in a loss-making position or premature exit.
  • Neutralization of the psychological justification mechanism.

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Success in trading as an ability to follow a proven trading plan

Great traders consistently follow the set rules. They tested their trading systems under various trading conditions and follow them strictly without doing random actions in the market. Professionals, unlike beginners, do not give way to the destructive effect of thoughts which contradict the set rules.

There are traders who allow for violations of a trading system in their trading. They justify such behaviour with their mastery and so-called ‘feeling of the market’. Such an approach can work for some time but in the end the followers of this ideology will inevitably fail in the market.

Execute trades only by those setups which were proven by the time. Do not behave adventurously saying to yourself: “I am so good in trading that I can execute trades without relying on my trading system”. You do not have a plan for how to control such trades. Besides, you do not have information that the actions you are about to perform have statistical advantage.

Rationalization of decisions to decrease or increase the number of trades

So, we understand now that it is dangerous to move away from the proven method of trading. The market will frequently provoke you to execute systemless trades that is why be very careful.

And now, please, imagine another situation. An extremely active trading day. The market demonstrates sweeping movements and high liquidity. You executed a number of trades along the whole trading system within several minutes. You’ve never come across so many trading opportunities and the market continues to generate them.

And the thought comes to your mind: “This day can change my whole life!”. Depending on the emotional context of this thought, you can make a decision either to decrease the number of trades by your trading system in fear to quickly lose the money or to increase the number of trades to make more money. This is exactly the moment when you are hooked! Your focus has shifted. You are not focused on the search for correct setups any more. Now you try to justify violation of the trading rules thinking about how many trades to execute: more or less than your system envisages. You are either within the power of greed and/or fear, which results in the lack of consistency in making trading decisions.

A boring trading day may also bring you to execution of an unjustified trade. Perhaps, everyone knows the situation when a trader opens a trade just for the lack of anything better to do justifying himself: “Well, I cannot just sit without doing anything!”

Continue to focus on the search for reasonable trades which correspond with your trading system. Let market conditions and your trading system, rather than greed or fear or justifications, decide when you trade and when you don’t.

Justification of staying in a loss-making position or premature exit

Any working trading strategy should contain the rules of exiting a trade. If you do not know when to exit, it means you haven’t prepared for trading properly and neglected one of the most important aspects of your trading plan. The exit is the moment of taking a profit or limiting a loss that is why you should know exactly when you need to exit a trade before executing it. However, even if your trading system clearly identifies conditions for exiting a position, you can still fall into a trap.

Traders often invent justification for staying long in a loss-making position. Usually, a trader thinks at such moments: “I should have posted a stop wider since the market situation changed”. After which a trader decides to increase a stop loss and, consequently, potential risk without being aware that he violates the rules of his trading system.

The problem is that you change your strategy in the process. Why do you need your strategy at all if you change it on the fly in the process of trading? If your strategy tells you that you should exit a trade, you should exit independent of what thought occurred to you at that moment.

The majority of beginner traders lack patience. This weakness manifests itself in a failure to hold profitable positions until working out the goals. As soon as the price moves in the required directions they immediately look for justification to leave the market in a hurry in order to take at least some profit. “The market situation may change at any moment that is why it is better to exit with a smaller profit than with a loss”. As a result, such traders make a small profit which, potentially, will not be able to cover losses which they inevitably make in the future.

One way or another, you will be led into different temptations in the process of trading. You have a trading plan in order not to give in to temptations. Stick to your plan through thick and thin!

Neutralization of the psychological justification mechanism

There is no easy way to get rid of self-justification expressed in an effort to rationalize errors. In fact, such a trader’s behaviour is the natural psychological self-defence. The only way to eliminate the influence of such unconscious thinking processes is to ignore them and focus on execution of your trading plan. Your efforts to rationalize your faulty actions could be neutralized only through strict observation of the rules of your trading system.

It could be useful for some traders to prepare a list of possible justifications. Look through such a list and decide what you would do if one or another erroneous thought occurs to you. Resist the impact of the psychological justification mechanism which undermines your success in trading. Happy trading!

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