TradingKey - The crude oil market (USOIL) is known for its frequent fluctuations, which can easily amplify the psychological weaknesses of traders.
These emotional pitfalls not only affect your trading decisions but can also lead to significant financial losses when left unchecked.
Therefore, it’s crucial to recognize the mental traps that influence us and learn how to minimize their impact on our trading.
What Is Greed?
Greed is like a bottomless pit—no matter how much money you’ve made, it keeps whispering, “It’s not enough!”
In the first half of 2020, the crude oil market underwent extreme fluctuations that bewildered many investors. Some traders boldly bought in at low prices, and as prices rebounded sharply, their accounts quickly accumulated substantial profits.
However, instead of locking in their gains, many began fantasizing about "mountains of gold" just ahead.
Driven by greed, they not only failed to take profits but also doubled down on their investments, hoping to make even more.
When the second wave of the global pandemic hit, crude oil demand plummeted once again, causing prices to drop sharply.
Those blinded by greed had no time to savor their newfound wealth before facing devastating losses.
Greed makes you forget about risk and pushes you to chase higher returns recklessly.
Once trapped in the grip of greed, your decision-making becomes irrational, and your hard-earned wealth can vanish in an instant.
(Source: Freepik)
What Is Fear?
Fear often leads to prematurely ending profitable trades.
Take 2022 as an example: the market turbulence triggered by the Russia-Ukraine conflict caught many investors off guard. As prices began to fall, fear spread rapidly, prompting a mass sell-off of crude oil assets.
Another harmful consequence of fear is missed opportunities.
When the market started to recover, some investors remained paralyzed by anxiety, fearing that the rally was only a temporary bounce. Hesitant to re-enter the market, they ultimately missed out on potential gains.
Fear can create a dilemma, leaving you caught between difficult choices in the market. It clouds your judgment, making it difficult to act decisively when needed.
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(Source: Freepik)
What Is Blindly Following the Crowd?
Many novice investors tend to follow the footsteps of others rather than conducting their own research when entering the market.
However, every investor has different goals and risk tolerance levels, meaning someone else’s success story may not work for you.
At the same time, they are heavily influenced by the "herd mentality," blindly buying or selling based on what others are doing.
This behavior can lead to poor decisions, as markets are unpredictable, and following the crowd doesn’t guarantee success.
What Is Loss Aversion?
Let’s take an example:
Imagine you buy crude oil futures, but the price starts to fall.
You believe the price will rebound and refuse to cut your losses.
However, the reality is that the price continues to decline, and your losses keep mounting. By the time you finally decide to exit the trade, the damage is already severe.
Why does this happen?
It’s because humans are naturally more sensitive to losses than to gains. Admitting a mistake means accepting failure, which is emotionally painful for many people.
Instead of facing reality, they choose to avoid it, hoping the market will reverse in their favor. Unfortunately, this frequently leads to even more negative outcomes.
What Is Overconfidence?
Overconfident investors believe they have exceptional predictive abilities to the point where they ignore objective facts and new information.
They start making frequent trades or take risky contrarian positions without considering the complexity and unpredictability of the market.
These traders dismiss new data that contradicts their beliefs and rely solely on their judgment. This overconfidence can lead to reckless decision-making, exposing them to unnecessary risks and potential losses.
(Source: Freepik)
How to Avoid Falling into Psychological Traps?
- Develop a Trading Plan and Stick to It Strictly
What is the core of a trading plan?
One key element is setting stop-loss and take-profit points.
For example, when buying crude oil futures, you set a 5% stop-loss point.
When market conditions worsen and the price falls to your stop-loss level, you execute the trade without hesitation, successfully avoiding greater losses.
At the same time, you set a take-profit point at a 20% increase. When prices reach that point, you confidently execute your sale, ensuring a substantial profit.
Another critical aspect is managing your position size properly.
Avoid putting all your capital into the crude oil market, as this could expose you to excessive risk during periods of high volatility.
Most importantly, don’t forget to strictly enforce your plan.
Many traders create a solid trading plan but fail to execute it due to emotional interference during actual trading. Discipline is the cornerstone of successful trading.
- Continuous Learning and Self-Reflection
Why is continuous learning important?
The crude oil market is influenced by multiple factors, including global economic conditions, geopolitical tensions, and changes in supply and demand. These elements operate on both fundamental and technical levels.
Only by continuously learning and deepening your understanding of how these factors work can you better predict market trends and make informed decisions.
(Source: Freepik)
- Learn Professional Knowledge
Read classic financial books like Technical Analysis of the Futures Markets and The Intelligent Investor.
These resources help you build a strong foundation of investment knowledge.
Follow authoritative financial media outlets (such as Bloomberg and Reuters) and institutional reports (such as those from the IEA and OPEC) to stay updated on the latest market information and analysis.
- Study Psychology
Investing is not just about mastering techniques and information; it’s also a psychological game.
By studying psychology, you can better understand your mental weaknesses and learn methods for managing your emotions.
Familiarize yourself with concepts like cognitive biases and herd mentality to avoid common mistakes. Understanding these psychological pitfalls will empower you to make more rational and disciplined decisions.
