Empathy gap is the main reason behind most trading mistakes. Empathy gap is the difference between how you believe you will act under certain circumstances and how you actually act when the time comes.
– I want to grab that stock on a pullback to its rising 50-day moving average and then do nothing when the moment comes;
– I will buy this stock when it breaks out of this range on volume and when the time comes you don’t buy it, because the stock jumps 5% the minute it breaks to new high. You wanted to pay $50.25 and at $52 suddenly seems expensive. Then you watch it go to $60;
– I will short the crap of that stock when it loses that $100 support, but when it does, you don’t do anything;
– I am not going to chase that stock here. It is too extended and the risk to reward is not worth it and yet you still buy it because everyone you know is making tons of money in it;
– I will stick to my hard stops next time…
Most market participants have incredibly short-term memory. Greed and fear have the power to erase even the most well thought out plan and make the smartest people behave silly.
Ignorance is not the main hurdle. A lot of people have excellent understanding of how market works and what their biases are, but yet very few are able to put that knowledge into practice. It is the difference between knowing how to lose weight and doing it, but 10 times harder. This is why so many successful people are not afraid to share everything they know – the “secret” to their success. Most people will never put the efforts and the time to consistently apply that knowledge in their everyday trading/investing process. It is human nature.