Pick any competitive environment (e.g. sporting, business, etc) and I’ll bet, that if you where to ask the leader in that field what their secret was, the answer would be their mental approach, or mindset.
Tennis stars, golfers, footballers, basketballers, most, if not all, attribute a larger part (typically 80%) of their success to their mindset and a meagre 20% is typically attributed to their unique ability or skills.
Trading is no different.
The difference between the ‘master’ trader and the novice, or average trader is their mental approach to the task.
Whether it be, the ability to think independently of the crowd, the ruthless execution of stops, or having the patience to sit and wait for the best opportunities, these traits all start and finish in the psyche of the trader.
A critical component of any trading plan is your psychological plan. It should put you in the right mindset, maximise your strengths and set a framework to monitor and improve your performance.
Let’s take a look at some of the key elements of a trader’s psychological plan.
Your Psychological Plan:
- Aim to make decisions independent of the ‘crowd’ – learn to ‘read’ the “markets’ psyche”. Identify when you may be caught in the same euphoria or despair as other less educated market participants.
- List the pros & cons of every trade (before entering the position) – avoid confirmation biases by taking the opposite view of the trade. STOP and ask yourself, why would someone be on the other side of this trade? What reasons are motivating them to buy or sell? Learn to put yourself in the shoes of other market participants.
- Understand all money is created equal, both real & paper profits – don’t give up paper profits. This money is YOURS. Set a clearly defined ‘profit-protection’ stop for each trade you have open. Make sure you EXIT when your stop is triggered!
- Learn to be patient – top traders and investors know when to sit out of the market. Don’t ‘push’ a trade just to be in the market. Sit it out if the market conditions do not suit your trading strategy.
- Learn to recognise loss avoidance and face saving actions – e.g. Cognitive dissonance, Loss aversion, Sunk cost, etc.
- Understand markets can over-react on the up & downsides – markets always run further than most people expect. Assume the trend is intact until there is DEFINATE evidence to the contrary.
- Understand trading involves risk – trading involves risk, your aim is to limit your risk and simultaneously increase your odds of achieving larger gains.
- Avoid blame and regret – analyse and learn from your losses, but do not dwell on them – learn and move on.
- Watch overconfidence – Men more often than women suffer from overconfidence. When you start to think “this is easy”, alarm bells should be sounding…..
- Don’t look for excuses to remain in a losing trade – what more can be said! The worst way to stop trading is because you have NO CAPITAL left.
- Understand mistakes are part of the process – but failing to correct a mistake is a capital killer.
- Understand the probability of trading – every trading strategy, regardless of the accuracy rate, will experience a series of losses. Know what your odds are, for from your trading strategy, of experiencing a series of losses. Appreciate that if you trade long enough, this will happen.
- Think in terms of the NEXT 100 or 1000 TRADES – this is probably the single most important piece of advice. Don’t get hung up on a couple of losing trades. Think long term.
So far in this series we have looked at gaining an advantage over our fellow traders, we’ve touched on why trader’s fail to sustain success and we have delved inside the mind of a trader to examine some common trader preconceptions and how you can overcome them.
Next we’ll explore the trading journal, what it should contain, how to get the most out of it and how to set up a feedback loop for continuous improvement.
If you can’t wait until then, I recommend you download my FREE Manual ‘The No Bull@#t Guide to Achieving Profitability’.
You can get instant access to the Manual by simply entering your email in the ‘sign up’ form at the top of this page.
‘Til next time, I wish you the ultimate in trading success.
