Now what does Psychology or your mindset have to do with trading? You might not believe it, but it has a huge amount to do with it – ask anyone who has been trading for a little while.
Trading boils down to three main areas – your Mindset (or psychology), your Money management (how you manage your risk) and the Method you use to buy and sell (your trading system). The three Ms!
Of those three areas, your mindset and your ability to control it are by far the most important! The key is that your mind drives everything you do in your life and trading is no exception.
“There are no limitations to the mind except those we acknowledge.”
So it begs the question, doesn’t it? What is it that separates the successful from those who fail? Why are most people who start trading unsuccessful yet there is this small group of people who are successful?
If you ask anybody who has studied trading for any period of time, they will answer ‘psychology’. Essentially, your mental ability to manage losses and profits and the good and the bad times in trading, manage risk, to not become too greedy and many others are all encapsulated under the heading of ‘trading psychology’.
OK, let’s accept that your mindset is crucial to your success. Your Mindset – what does that mean? Often it comes down to you as a person and your character attributes – what are your strengths and weaknesses? Are you a level headed person / are you highly emotional? Are you disciplined and willing to work hard to achieve results? I hope so …
Let’s look at some character attributes for a moment (there are a few of them).
There is one overriding influence on your trading success and that is your attitude. I believe that your attitude will determine whether or not you are profitable with your trading. Your attitude is more important than any of the character attributes required for successful trading; it is more important than your market knowledge and your degree of skill.
I am inspired by the following quote and believe it is applicable to trading.
“The longer I live the more convinced I become that life is 10 percent what happens to us and 90 percent how we respond to it.”
It is not important what the market does to you, it is how you react to it that is important. For example, it is not important that you are faced with yet another losing trade, what is important is how you react to that situation. Do you get upset and allow your emotions to cloud your judgement or do you react calmly accepting that loss as a part of trading and move on from the experience.
Swindoll’s words are true when applied to anything in life, yet I don’t think many people would consider how powerful that statement really is.
I think one of the most underestimated attributes of successful traders is patience. Patience is a factor in a number of different situations in trading from trade entry, to trade management and your expectations.
One of the most important attributes (in anything in life really) is self-confidence. Self-confidence is a measure of your belief in yourself, and has a number of consequences in trading should you lack it. Essentially, being successful requires you to trust and follow your trading plan. If you lack self-confidence, then you are not likely to trust and follow something you have developed.
Confident traders rely on their own methodology, for example how they trade forex, and not what others are saying. In line with this, I think it is important to never give tips and moreso, never listen to them.
I think the best advice when talking about trading to others is to keep your mouth shut about your own positions.
Emotions are probably the single biggest problem we face when trading (along with a lack of discipline). Trading the market is like running a business and anyone who has run a business successfully will tell you that emotions should have little place in your decision making.
Trading successfully is all about decision making, although because of money and our natural instincts, many people cannot remove their emotions from their decision making process, sufficiently.
Further to decision making, it might be worth considering the importance of being decisive and disciplined with your decision making and importantly, focussing on the right areas. Too many people expend too much energy worrying about the wrong things.
How much control do you have when you are trading and over the markets? There are various parts of a trading plan which are easy to control however just as many that are quite difficult if not impossible to control.
One of the first problems that many people face is that of unrealistic expectations. This can make you come unstuck very easily. What makes people think that they can start trading one day and be super profitable from day one is beyond me. Yet, some do.
“The dictionary is the only place where success comes before work. Hard work is the price we must all pay for success.”
Once they realise there may be some work involved, many search for the holy grail of trading. The Holy Grail is often referred to in trading circles as the perfect trading system; the perfect conditions or indicator that will guarantee success in every trade you enter.
The reality of trading is that there is no such trading system in existence. It never has existed and never will.
“How to succeed? Try hard enough.”
It all sounds a little difficult, doesn’t it? It shouldn’t be … I believe anybody can achieve anything they set their mind to. So can you!
Let’s quickly review what successful traders really do … let’s look at the winning factors. There are a number of specific factors that assist winning traders and that losing traders don’t consider. Winning traders focus on the right things – things that matter.
Another problem that people can have is to take trading too seriously. The problem here is that the individual will feel the weight of the world on their shoulders and crumble under the pressure. It is very important that you always maintain a clear mind and perhaps consider trading like any other game or sport.
A very positive thing you can do is occasionally schedule a break from your trading. Sometimes trading can be quite stressful and other times it may appear as if you can do no wrong.
These emotional swings and emotional stresses do impact on your mental state and can ultimately affect your trading decisions.
We focus so much on what can go wrong (I think it is important to do so as to avoid making the same mistakes). however when things do go well, you should certainly reward yourself for it.
In some way, reinforce to yourself that you have had a great trade and have followed your trading plan to the letter in doing so. It helps reinforce the positive and instill in you that good things can happen when you follow your plan.
Another key consideration when preparing yourself to make your own trading decisions is where you are going to make your decisions. For example, are you going to be trading from work, or in the home office? Where are you going to be more focused? This is important because you need to be able to reduce the effects of any possible distractions, but also eliminate the influence of how you are feeling.
This would be especially relevant if making your decisions at home where distractions could potentially be numerous. It is important that you are relaxed and able to focus when you sit down to review your positions and to identify potential trades.
Books like ‘Market Wizards’ by Jack Schwager and other similar texts illustrate how successful traders have found a trading methodology that they are very comfortable with. None of them have found any magic solution to trading but they all clearly possess an inner confidence in their own ability to follow rules and their own trading plan.
To develop a solid trading plan requires commitment and discipline, but more importantly time to sit down and work through it methodically. At the end of the day, if you are not comfortable with the way you approach the market, then you will likely drift away from your plan and fall into bad habits. In this situation, it is highly probable that you will lose money.
If you want to trade well and therefore develop a trading plan and follow it, you need to convince yourself that it is something you really want to do. Commit to it and there really shouldn’t be anything stopping you developing a robust trading plan that will over the long run be profitable.
Do you have a trading plan? Have you fully committed yourself to following it?
What Can I Do for You?
As a private equities and FX trader, best selling author, trainer, and coach, I have worked in the financial services industry for over 20 years helping companies all around the world.
I have written detailed market commentary of equities, foreign exchange, indices and commodities for several leading brokerages around the world. I offer detailed technical analysis providing a real traders perspective on price action, trends and key levels in order to assist clients make more informed decisions.
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