I know that many of you might have experienced the pain of giving back your profits after a winning streak. If this incident has happened to you, then don’t worry, you are not the only one. After a winning streak, many traders become overconfident and give all their profits back or probably even more. Through this article, we will try to understand Why Traders Give Back Their Profits after a long winning streak.
Psychology is the most important aspect of trading, and it plays a key role when you trade. As traders become more and more confident due to continuous winning trades, they feel that they have conquered the markets, and have become the experts of trading now. That is the point where they terribly go wrong. The second, from which you start thinking that you have conquered the markets and no one can beat you; you have already started losing. This is because markets always punish ego and overconfidence and reward humbleness and learning attitude.
So, throughout your stock market journey, keeping a learning attitude is always important as learning is the only thing that will keep you in the markets for a longer time. Another most common reason due to which traders give their profits back is ” recency bias.”
Recency bias is the psychological phenomenon where humans give more importance to recently happened incidents compared to the events that happened way back. So, when traders give more importance to a winning streak, they become more confident about their system. As a result, they take high leveraged positions neglecting Risk Management rules that cause them to give back their profits.
When we give more importance to recent winning trades, it typically gives us more confidence. As a result, we take more trades with more quantities and end up giving back profits.
For example, let’s consider a new trader who doesn’t have that many skills and understanding of the markets. There is a possibility that he may be lucky quite a few times in his early stage of trading, and he may book profits in continuous 3 to 4 trades due to easy market conditions such as trending markets where profits come easily if you go with the trend. Now, after continuous 3 winning trades, he will be overconfident and will trade with more capital to gain more profits. But when there will be a change in the market cycle, his trading strategy will not work, and as a result, he may lose all the profits in one trade or a series of trades.
These kinds of experiences are very common for traders, nearly every trader experiences this. The point we should understand here is, Overconfidence with poor risk management techniques can blow up your account even in a single trade. So, irrespective of how confident you are in one particular trade, you should always follow risk management.
The solution for not being over-confident due to recent trades is to think in probabilities. There is always another person who is taking the exact opposite position as compared to yours. So, spend some time thinking, what’s going on in your opponent’s mind, which will help you to realise that you are not the only smart person in the room. Once you get in the right trading mindset, you won’t become over-confident because of your past trades.
One of the best solutions to avoid over-trading is to withdraw the profits frequently so that you will not be able to take bigger positions. Often, traders do not withdraw their profits, rather they use them for trading. It’s actually a good thing, but you should also withdraw some amount of profit. The feel of real money creates a psychological connection. The sense of real money is different from the numbers you see on your computer screen.
Generally, we care less about the trading profits as compared to real money. So, it’s always good to withdraw some profits regularly because you will become a more serious trader whenever you look at your trading profits. On the other hand, if you put your trading profit in your account, then there is a possibility that you may become less sensitive about your losses.
Giving back profits is the most frustrating incident in a traders’ life, but it can be avoided in various ways as we discussed above. Through this article, I hope that you will be able to protect your hard-earned profits in the future after getting some valuable learning.
In reality, it is very difficult to deal with the mental as well as financial aspects after giving back your trading profits, so it’s always better to prepare for this situation and avoid its consequences.
After interacting with many of my students, I got to know that many traders become over-confident, and that is the only main reason due to which they give their profits back. So, my honest advice about this to everyone is to stay humble and keep learning even from your profits. A learning attitude is very important for sustainable growth in the market.
If you want to know more about Risk Management & Intraday Trading Strategies you can refer to our previous blog on
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