How to beat the Yo-Yo effect in trading for steady trading growth?

The “yo-yo effect” in trading refers to a cycle in which one experiences successful profits for a period, leading to overconfidence and carelessness, ultimately resulting in trading losses.

In fact, during a winning streak in trading, one tends to focus on the outcome, and arrogance can lead to mistakes. Want to break free from this vicious cycle? Here are some suggestions:

Avoiding Recent Bias

In its most basic sense, recent bias refers to the tendency of traders to focus only on recent events while ignoring earlier but equally important (sometimes even more important) information.

Recent bias affects how traders analyze the market, as it influences their judgment, impairing their decision-making abilities.

One common manifestation of recent bias in the currency market is traders focusing solely on recent trading decisions, overlooking the bigger picture.

An example is a fundamental trader assigning too much significance to recently occurring economic events without considering the broader macroeconomic backdrop.

Another example is a technical trader placing too much emphasis on newly formed candlesticks, losing track of the long-term trend.

If your trading performance is affected by your recent gains or losses, here are a few simple techniques to help eliminate recent bias:

Keep a detailed trading journal.
Devise a trading plan and stick to it.
Always keep an eye on the bigger picture.

Beware of Overconfidence

While maintaining confidence during trading is important, believing that your system can never fail is different from having confidence that your system can perform consistently over the long term.

Overly confident traders may encounter a series of potential problems. Traders may trade more prominent positions than what their trading systems dictate.

Alternatively, once stopped out, they may attempt to re-enter in the same direction, believing that prices will eventually move in their anticipated direction.

This is why remaining humble and controlling emotions is essential, even during a winning streak. If you don’t, you may become excessively lenient with your execution performance, impacting your trading account in the long run. The best solution is to stick to your trading plan and be wary of overconfident emotions!

Find Other Ways to Measure Self-Worth

Another way to avoid the yo-yo effect in trading is to base your self-worth on something other than your trading account balance.

If you let the fluctuations of trading define who you are, you will only create a stressful environment that ultimately doesn’t benefit your trading.

Make an effort to find fulfilment in other aspects of life, such as your relationships, your work, or your hobbies. Doing these things will make your life feel more fulfilling and satisfying. An additional benefit is that it will create a stress-free environment that will help your trading performance.

Note that overcoming the yo-yo effect in trading is something you must deal with day after day. This will require a lot of work, effort, and focus. Following the above suggestions will help you steadily achieve sustained profitability.