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2024-06-05 • Updated

Random Reinforcement: Why Traders Lose Money


Are you having trouble with trading? Have you started losing money after a long period of successful trades? Many traders experience the same problem and can’t understand what they are doing wrong. But before you decide to drastically change your strategy or quit trading altogether, you might want to learn about something called random reinforcement and how it can be responsible for your trading failures.

Key Takeaways

  • Random reinforcement is a psychological phenomenon that encourages bad behavior and punishes good behavior.
  • It makes beginners think they are more skilled in trading than they really are while experienced traders start doubting themselves.
  • To combat random reinforcement, both new and seasoned traders need to research and develop a solid trading strategy. If it withstands the test of time, traders won’t be so quick to doubt its efficiency.

What Is Random Reinforcement?

Even though it is often mentioned in the context of trading, random reinforcement is actually a psychological concept. It refers to a paradoxical tendency to draw correlation between one’s actions and a random event.

In trading, this usually occurs when traders experience success or failure and think the reason behind it is their skill or lack of it. Usually, this ends up being true. But when an amateur trader scores several wins in a row and an experienced trader hits a losing streak, skill has nothing to do with it. It is simply a coincidence. Still, these traders think otherwise, falling into the trap of random reinforcement.

How Random Reinforcement Affects Trading?

You might say, “Oh, but isn’t it good for new traders to get a confidence boost?” or “Well, sometimes even experienced traders need to change things up, it’s not that bad.” But the reason random reinforcement is considered harmful is because it creates a false narrative.

The market movements are unpredictable. The only way traders can succeed in the long run is by adapting to its random nature. So when complete beginners luck out in the very beginning, it can go to their head. They might think they have found an easy way to make money in the trading world. So instead of developing their skills, learning, and improving their understanding of the market, they get stuck in the same place. Soon, however, it will become clear that this tactic doesn’t always work and they will need to learn more about trading to get stable and consistent profit for their trading account.

As for experienced traders, random reinforcement can cause lots of problems for them. When they see their trusted strategy no longer working, they might start to doubt their skills and their entire approach to trading. And when their new strategy ends up a failure, they may actually believe that they have lost their expertise and even quit trading.

So, as you can see, random reinforcement is dangerous as it punishes good behavior and encourages bad behavior, leading to confusion and trading failures.


Why Does Random Reinforcement Happen?

It is just human nature. We, as a species, tend to seek significance everywhere. The existence of random events is hard for us to accept. It would mean we cannot control everything. That’s why novice traders are more likely to attribute their success to their natural talent rather than a coincidence. The same thing happens to experienced traders. They start to worry about their performance and lack of skill while their trading failures are just bad luck.

Examples of Random Reinforcement

Let’s look at some examples of how random reinforcement can lure traders into a trap.

A trading “prodigy”

Jim is a new trader who has just finished his beginner’s course. Jim now knows the basics about the market movements, charts, simple strategies and other bits of information. He also follows the news and keeps an eye on the stock market. All in all, Jim knows just about the same as any other aspiring trader.

Soon, Jim decides to finally try real-life trading. He has already practiced with a demo account, so he knows a thing or two about how to trade on the real market. Although he never wrote down any strategies or plans, Jim isn’t worried. He will get there eventually.

When he finally opens the charts, he sees that one of the stocks is currently on the rise. He quickly buys a couple of lots and waits. The price ends up rising even higher, and Jim quickly sells the lots. He actually made money! Jim is elated, but he doesn’t stop. He repeats these actions some more time and manages to profit from all of his trades. He can’t believe it’s that easy! Why did he spend so much time trying to memorize all these patterns and strategies? He knows what he’s doing even without them. He’s a natural at trading.

But as time passes, Jim’s newly found talent starts to let him down. He can no longer profit from his trades. Instead, his balance starts depleting and his commission piles up. He tries to open more positions to make up for his losses, but it’s all in vain. Soon, all his money is gone, but he doesn’t understand how it happened. It has been going so well, hasn’t it?

This is a prime example of what random reinforcement can do to a beginner. Trading without a proper plan and risk management strategy can cause a series of trading failures and quickly destroy a trader’s account.

An incompetent master

This example will show how random reinforcement can affect a seasoned trader.

Jenna has been a professional trader for the last 6 years. She has come a long way since her first unsuccessful attempts at trading. She has learned from her mistakes, developed a good strategy and risk management plan. She knows her profit targets, enter and exit points, how to keep her emotions in check, and where to put stop orders. She makes enough from trading to live a comfortable life, and she is always eager to improve her skills.

But at some point, she can’t seem to break a losing streak. Her trades fall through, her losses start accumulating, and she begins to feel frustrated. Jenna keeps going over her strategy, checking whether she is doing something wrong, but it just doesn’t seem to be working for her anymore. She even takes a break to clear her mind, but things aren’t improving.

Desperate, Jenna scrapes her old strategy and decides to use another untested one. But it doesn’t help at all. She starts to think that maybe she has somehow lost all her skill and understanding of how the market works. Perhaps, it is no longer something she can do. She is no longer feeling confident, and even the thought of trading makes her anxious. In the end, she decides to quit trading altogether.

As you see, even experienced traders can fall victim to random reinforcement. Just like Jenna, they start to doubt their own skills and knowledge instead of realizing that it is just an unfortunate coincidence.

How Can You Avoid Random Reinforcement?

The most straightforward way for both beginners and trading veterans to avoid random reinforcement is to prepare a solid trading strategy. Think about your preferred risk level, try to find the best entry and exit points, develop a risk management plan and write it all down. If your strategy works over a long period of time, stick to it no matter what. Even if you suddenly start losing your trades, don’t panic and don’t try to change something that has proven itself useful over the years. Your well-researched strategy will help you overcome any obstacles as long as you don’t doubt your own skills.

Another important thing for any expert is to never stop learning. Learn about the main principles of fundamental analysis in trading, study the technical analysis tools, and never stop looking for new ways to better your understanding of the market. When you finally figure out how trading works, it will become easier to find ways to adapt to the market’s unpredictability and find new ways to improve your strategy.


Random reinforcement is one of the most common ways traders end up losing their money. It can make new traders believe that they know everything about trading while seasoned traders start doubting their skills.

The market movements are often unpredictable and random. The only way traders can avoid this trading failure is by preparing a well thought-out trading strategy and using it no matter what. Beginners in forex trading can get inspiration from various guides and learn more about forex strategies for beginners and activities for a beginner trader.

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