It doesn’t matter how much money you have, it doesn’t matter how good of a technical analyst you are, and it doesn’t matter how much you ‘think’ you know about trading, if you don’t have the right mindset, you will never make money in the market.
Your success or failure in the market depends on your mindset. Most traders know something about how important psychology is in trading, but they either file it away as something they’ll ‘work on later’, or they just ignore it altogether. Huge mistakes. HUGE.
If you’re trading with the wrong mindset, it doesn’t matter if you have fifty grand in risk capital to trade with and you’ve mastered your trading strategy, you’re still going to fail. No strategy and no amount of money will make you money if you don’t have your head right about trading.
Let’s discuss a few of the more important aspects of trader psychology that you need to understand if you want to achieve a trading mindset that will prime you for lasting success in the market.
Money and mindset
Whether you think it does or not, risking money in the market influences your mindset. The most important factor in achieving and maintaining the proper trading mindset, is carefully managing your risk on every trader you take.
Risking more than you are comfortable with, will ‘infect’ all other aspects of your trading and it will start you out with the wrong mindset as soon as the trade begins. That is to say, it will make you overly-emotional and attached to the trade.
In what might seem like a cruel twist, the more you ‘care’ about a trade, the less likely you are to manage it properly. What I mean by that, is that the more attached and emotional you are with a trade, the more likely you are to over-analyse, over-think and be over-involved with it. The primary way you get to the point of caring ‘too much’ about a trade, is by risking too much. There’s a direct correlation between how much money you risk on a trade and how emotional you become about it. And if you’ve read my article on the the Four Horsemen that are killing your trading, you already know that being overly emotional about your trading is how you lose money.
The key is to smart with small amounts when you first start trading live. You will need to ‘test the waters’ a bit to find your risk ‘sweet spot’, where you aren’t too emotional about your trades. Start with a very small amount of money, one that you wouldn’t think twice about losing. Once you hit a risk amount that causes you to become ‘glued’ to your charts and unable to sleep easily at night, you’ve gone too far and you now need to dial-back your risk to a smaller amount.
Obviously, the dollar amount you’re comfortable with risking will vary for everyone as everyone has different financial situations, trading skill, risk tolerance, etc. It will take a bit of trial and error to find your sweet spot, but it’s critical you do this and it’s critical you don’t exceed that dollar risk amount. Your entire trading mindset and how you perform in the market depends on it.
Expectations are key
Traders often come into the market with extremely unrealistic expectations about many things. They are unrealistic about how long it will take them to learn how to trade properly, how long it will take to be consistently successful, and how often they will have winning trades. When you begin something with a boatload of unrealistic expectations, you’re simply setting yourself up for emotional pain, to say the least.
To help you keep your expectations in-line with the reality of the market, start by reading my recent article on the key to lasting trading success. In that article, I talk about the random distribution of winners and losers for any given trading strategy or edge. Most traders make the mistake of ‘expecting’ every trade to win, while forgetting that their trading strategy might have an overall win rate of 60% (or less even). This means they will lose 40% of their trades, but the key is that you do not know WHICH trades you’ll lose and which you’ll win.
Given this random distribution of winners and losers, it’s no wonder so many traders lose their discipline and patience and start over-trading and losing money. It takes an iron-clad mindset to remember that any one trade doesn’t mean that much, but that you have to stay the course and stay true to your trading strategy over a large enough series of trades to see your edge play out.
You must relinquish all emotional attachment to trades. Along with controlling your risk as we discussed previously, you can do this by controlling your expectations about trading and your trades.
Simple is better
Human beings have a tendency to complicate things that should be simple, making things more difficult than they really need to be. This is especially true in trading. When you have a complicated and messy trading strategy, it’s going to be the first thing that influences your trading mindset in a negative way. It’s critical that you remain calm and clear-headed when trading, and in order to do so, you need a simple trading strategy, like price action.
The actual act of analysing the market and identifying key chart support and resisance levels, trends, price action setups, etc. is not the most difficult part of trading. The most difficult part is risk management, profit taking and trade management; and all of these things are going to be made exponentially more difficult if you are in the wrong frame of mind due to trading a messy and overly-complicated trading method.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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