Developing “The Trader’s
Mindset” is a must for trading success, but this can take some time.
This is not an area where you can take a shortcut or learn a formula.
You usually develop this mindset by actually trading and learning from
the experiences you have while trading. A developed “Trader’s
Mindset” can help you handle account draw-downs, losses and profits.
Yes, profits or winning can actually cause stress!
Your psychology and beliefs will be major determining factors in your
trading results. Consider this: The same successful trading approach is
used by hundreds of traders and, usually, no two of them will trade it
exactly the same way. Why? Because each trader has a unique belief system,
and his or her beliefs will determine trading style and results.
That is why, even with a profitable and proven trading approach, many
traders will fail. They do not have the proper belief system to enable
them to trade well. In other words, they lack “The Trader’s
Mindset.”
When you encounter psychological issues, it is best to recognize them:
Be aware of and don’t deny they exist. To “fix” psychological
issues, we must first recognize the underlying causes. This facilitates
healing, in other words, much of what psychoanalysis is all about.
The psychologist or psycho-therapist tries to get the patient first to
see the issues causing his or her problems. The reason this process can
take so long, perhaps even years, is because the patient needs to, not
only recognize the cause, but accept it so as to be in a position to move
on.
The final step is “owning” one’s actions. Taking responsibility
for one’s problems helps one to heal.
The same process applies to trading: We need to take responsibility for
our trading results in order to make changes and be profitable.
Success in trading is the direct result of a sound trading system and
money management, proper capitalization and healthy psychology. All of
these must be in sync for you to be successful in your trading. The only
area where you may need additional help, once you have mastered your trading
skills, is in getting your psyche healthy.
Mastering your psyche is an ongoing process that really never ends. And,
the amount of time it will take will be different for each trader.
Here is a list of common psychological trading issues and their causes:
- Fear of Being Stopped-Out or Fear of Taking a Loss:
The usual reason for this is that the trader fears failure and feels
as though he or she cannot take another loss. The trader’s ego
is at stake.
- Getting Out of Trades Too Early: Closing a position
relieves anxiety. The trader fears position reversing and the subsequent
let-down feeling. The trader may have too great a need for instant
gratification.
- Adding onto a Losing Position (Doubling Down):
This action is the result of not wanting to admit your trade is wrong.
You’re hoping it will come back. Again, ego is at stake.
- Wishing and Hoping: These come out of not wanting
to take control of or responsibility for the trade. The trader is
unable to accept the present reality of the marketplace.
- Compulsive Trading: Traders who trade compulsively
are drawn to the excitement of the markets. These traders have addiction
and gambling issues. They feel they need to be in the game.
- Anger after a Losing Trade: Traders experiencing
this anger feel as though they are victims of the markets. They have
unrealistic expectations and care too much about a specific trade.
They tie their self-worth to their success in the markets. They are
seeking approval from the markets.
- Excessive Joy after a Winning Trade: Those experiencing
undue exhilaration after a trade are also tying their self-worth to
their success in the markets. They feeling unrealistically “in
control” of the markets.
- Limiting Profits: This action results from feeling
that success in the markets and the resulting profits are undeserved.
The psychological issue here is poor self-esteem.
- Not Following Your Proven Trading System: You don’t
believe your system really works. You did not test it well. It does
not match your personality. You want more excitement in your trading.
You don’t trust your own ability to choose a successful system.
- Over-Thinking the Trade, Second Guessing Your Trading Signals:
You fear loss or being wrong. You want a sure thing where sure things
don’t exist. You do not understand that loss is a part of trading,
and the outcome of each trade is unknown. You do not accept that there
is risk in trading, nor do you accept that outcomes are unknowable
ahead of the fact.
- Not Trading the Correct Position Size: These traders
do not fully recognize the risk nor do they understand the importance
of money management. They refuse to take responsibility for managing
their risk.
- Trading Too Much: People who trade too much need
to conquer the market. They are motivated by greed. They try to get
even with the market for a previous loss. They are compelled by the
excitement of trading. (This one is similar to “Compulsive Trading”
previously described.)
- Fear of Making the Trade: People afraid to “pull
the trigger” usually have no trading system in place. They are
not comfortable with risk and the unknown. They fear yet another loss
and / or total loss and ridicule and have a tremendous need to be
in control. They have no trust in their trading.
- Irritability after the Trading Day Is Over: Traders
exhibiting such irritability are on an emotional roller coaster driven
by anger, fear and greed. They put too much “stock” in
trading results and not enough in the process that is learning to
trade well. They focus on money too much and have unrealistic trading
expectations.
- Trading with Money You Cannot Afford to Lose or Trading
with Borrowed Money: Traders who do this are pinning their
last hope of success on the trades they make with this money. They
are reaching for a success they feel has eluded their grasp and fear
losing what they see as a last, best opportunity. They lack discipline
but have an abundance of greed and desperation driving them.
These are, by no means, all the psychological issues, but these are the
most common. They usually center on the fact that, for one reason or another,
the trader is not following his or her chosen trading approach or system.
Instead he or she prefers to wing it or trade on emotions, a practice
that will always get you into trouble.
Our goal as traders with respect to psychology is to maintain an even
keel so to speak. Whether we experience winning or losing trades, we should
not be affected. Obviously, we are trading better when we are winning,
but striving for balance whether we win or lose is the way we learn and
grow and, ultimately, become better traders.
Achieving “The Trader’s Mindset” takes time. It will
happen when it happens, and, when you achieve this level of mental ability;
it will come after working long and hard on yourself. It may even take
you unawares. It usually happens when you least expect it.
Here is a list of what one feels after acquiring “The Trader’s
Mindset.”
- A sense of calm
- Ability to focus on the present reality
- An absence of caring which way the market breaks or moves
- The ability to align trades in the direction of the market and flowing
with the market
- Not caring about the money
- Always looking to improve skills
- Accumulation of profits as skills improve
- An open mind; hard-and-fast opinions at a minimum
- Acceptance of the risk in trading
- No anger
- Ability to learn from every trade
- Equal acceptance of winning and losing trades
- Enjoyment in the process
- Trading a chosen approach or system and not being influenced by
the market or others
- Absence of a need to conquer or control the “market”
- Confidence and a feeling of being in control of the self
- A sense of not forcing the markets or the self
- Trading with money you can afford to risk
- An absence of feeling victimized by the markets
- Taking full responsibility for your trading
When you can read this list and genuinely say, “That describes
me,” you have arrived!
*Reprinted (and modified) with permission from Bennett
McDowell
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