THE TRADER’S PSYCHE
You know that you need a strategy. And you know that there’s more to trading than just having a strategy. In the previous chapter, you learned about the major mistakes that traders make, and you learned that your biggest enemy is not another trader, or market makers, or your broker – it’s YOU.
And YOU are your biggest enemy because of your emotions.
In this chapter, you’ll learn about the mindset and psyche of successful traders. Having a profitable trading strategy AND the right mindset will catapult you right into the 11.5% of successful traders we talked about earlier.
In order to develop the right mindset, you need to know what to expect when day trading.
Many traders mistakenly believe that trading will result in a consistentlyrising account balance, like having an ATM in their front yard.
But you already know that losses are a part of our business as traders. There will be some days and weeks when your trading exceeds your expectations, and there will be periods when your trading results are far worse than you expected.
It’s essential that you maintain a long-term perspective.
Day trading means playing a numbers game. You already know that you need to place at least 40 trades before you can look at the performance of the strategy. Most traders only evaluate their performance once a month, trying to have as many profitable months as possible. Hedge fundsevaluate their performances quarterly or yearly.
Long-term evaluations have their place, but if you look at your trading results daily, it will drive you crazy. That’s why we define weekly goals.
Sure, nobody likes going through a drawdown. But when you’re trading, it’s inevitable. The key is in how you deal with it.
In an interview with Jack D. Schwager for his book, Market Wizards: Interviews With Top Traders, the famous Richard Dennis said:
"It is totally counterproductive to get wrapped up in the results. You have to maintain your perspective. Being emotionally deflated would mean lacking confidence in what I am doing. I avoid that because I have always felt that it is misleading to focus onshort-term results."
And way too many traders focus on short-term results and lose their perspective. That's why they fail: they experience a loss or a bad week, and so they start trading a different strategy. And while the trading strategy they just abandoned is recovering from the drawdown, the new trading strategy may result in yet more losses, so again, they start looking for another.
It’s like a dog chasing too many rabbits: at the end of the day, he's totally exhausted and he has absolutely nothing to show for it, because he didn’t catch a single thing.
Day trading necessitates selective, wise, and patient trading methods. Successful day traders are practical, and do not go overboard when trading the market. They focus on the quality of each trade, not the quantity.
Here are some important characteristics of successful traders:
1.) Successful traders do not blame. They accept the losses they have, and they don’t dwell on them, or blame other people or conditions. They learn from their mistakes and move on with their trading.
2.) Successful traders have a system. They stick to their system of trading religiously.
3.) Successful traders have patience. They know that most positions will not be profitable the minute they are opened.
4.) Successful traders do not overtrade. They realize that overtrading puts their account at risk, and they know that not every day is a day for trading. They wait for high probability opportunities.
5.) Successful traders realize that nothing is 100% foolproof. They trust in their indicators, but they are aware of other factors that may influence their trades.
6.) Successful traders do not stay in a losing trade. They honor the stop losses that they set, and they do not hold their position in the hopes that the market will eventually “go their way.”
7.) Successful traders do not rush into trades. They take their time while selecting trades, and they are picky about which trades to jump on. They don’t place orders just for the sake of having a position in the market every second.
8.) Successful traders stick to a successful strategy. They have one to three techniques that really work, and they use them over, and over, and over again.
9.) Successful traders have the ability to adapt. They adjust their trading methods and decisions to changing market conditions.
10.) Successful traders know what type of trader they are. They don’t force themselves to trade with methods or strategies that do not fit their personality.
11.) Successful traders bank on consistent profits. They know that ignoring the small-profit trades and angling for a “grand slam” is a sure way to lose money.
12.) Successful traders take action. They don’t let their fear control their decisions or interfere with their trading.
13.) Successful traders use successful systems. Their trading methods and indicators focus on high probability trades, sound money management, keeping their strategies free of curve-fitting, and working their system into their business plans for successful implementation.
14.) Successful traders recognize a “good” trade. They don’t base their evaluation on profits or losses; they base it on whether or not they followed their trading plan to the letter. Even if they DID lose money, as long as they stuck to their plan, it is a “good” trade.
15.) Successful traders take time off. They realize the importance of taking breaks from trading and the markets to clear their heads.
16.) Successful traders do not fear losses. They realize that losses are a part of their business, and they expect them.
If you can adopt the right psychological mindset, then you’ll gain a significant edge in the market.
I can’t stress this enough:
The right mindset is one of the keys to investment success, and most traders fail to understand this.
Greed and Fear
When day trading, two emotions are constantly present: greed and fear. If your trade goes well, your natural inclination will be to trade even more, opening yourself up to significant loss. And if your trade goes wrong, fear will torture you. Fear of loss or fear of a further loss makes traders scared.
Greed and fear are destructive emotions, and all traders are influenced by them; they’re a natural part of every trader’s psychology. Greed and fear can make traders act irrationally: they may know what they should do, but they simply can’t do it.
The bottom line: if you’re scared or greedy, and you can’t control your emotions when day trading, then you’ll have a very difficult time being profitable.
But, when you trade well, in accordance with your trading plan, you will have a fantastic chance of success. Feel proud of yourself for good trades and decisions, but don’t dwell on them, or allow arrogance to set in. Keep your head up and continue to apply a sound trading strategy, even when you suffer losses – remember, they are just a part of the business.
Do not allow yourself to get caught up in positive or negative emotions understand the psychology behind trading and know that no trade is guaranteed.
Work on your mental state. If a trade goes wrong, try and work out why it did, and learn from it. Executing a trading method with discipline is the only way to overcome destructive emotions. Whether you’re a day trader or an investor, and whether you trade in commodities, stocks, or currencies, the fact is that your trading psychology WILL influence your results.
You should never trade without a solid reason. Don’t chase the market. If a market moves sharply, but you don’t participate in this move because your entry criteria weren’t met, don’t worry about it. If you miss a trade, another one will be just around the corner. Practice patience and discipline.
You need to control your emotions by having a specific plan to follow. Having the correct trading psychology is just as important as having a reliable trading strategy.
The more you are prepared mentally for trading, the better you will trade. Note my emphasis on better trading, not better winning. A good day in day trading is not defined by profits. Successful day traders define a good day as one that is researched and planned and follows their overall trading strategy.
The “Law of Attraction” says that “you get what you think about.” Here’s how to avoid negative emotions and to have a positive attitude:
Write down 10 “I Am” statements. These statements should reflect who you WANT to be, not necessarily who you are now.
Here are some examples of “I Am” statements:
I am a disciplined trader who follows his trading plan.
I am cool and relaxed when I am trading.
I am in control of my emotions.
I am a profitable trader.
Read these “I Am” statements every morning before you start trading. Read them aloud and read them like you mean it. Do it for two weeks, and I promise, you WILL notice a difference.