No matter how much money you have, how good you are at technical analysis, or how much you “think” you know about trading, you will never make money in the market if you don’t have the right mindset.
Whether you do well or poorly in the market depends on how you think. Most traders know that psychology is important in trading, but they either put it aside as something they’ll “work on later” or just don’t pay attention to it at all. Huge mistakes. HUGE.
If you trade with the wrong attitude, it doesn’t matter if you have $50,000 to trade with and have mastered your trading strategy. You will still fail. If you don’t have the right mindset for trading, no strategy or amount of money will make you money.
Let’s talk about a few of the most important things you need to know about trader psychology if you want to develop a trading mindset that will set you up for long-term success in the market…
Money and mindset
Putting money at risk on the market changes your mind, whether you think it does or not. Managing your risk carefully on every trade is the most important thing you can do to get and stay in the right trading mindset.
If you risk more than you are comfortable with, it will “infect” the rest of your trading and put you in the wrong frame of mind from the start of the trade. That is, it will make you too attached to the trade and make you feel too much.
In what might seem like a cruel twist, the more you “care” about a trade, the less likely you are to manage it well. What I mean is that the more attached and emotional you are to a trade, the more likely it is that you will overthink, overanalyze, and get too involved with it. The main way you can care “too much” about a trade is by putting too much on the line. There is a direct link between how emotional you get about a trade and how much money you risk on it. If you read my article about the Four Horsemen that are killing your trading, you already know that losing money in trading is caused by being too emotional about it.
When you first start trading live, the key is to be smart with small amounts. You will need to “test the waters” a bit to find your “sweet spot” for risk, where you don’t let your emotions get in the way of your trades. Start with a small amount of money that you wouldn’t mind losing. Once you reach a level of risk that keeps you “glued” to your charts and makes it hard for you to sleep at night, you’ve gone too far and need to dial back your risk.
Obviously, the amount of money you are willing to risk will be different for everyone because everyone’s finances, trading skills, risk tolerance, etc. are different. Finding your sweet spot will take some trial and error, but it’s important to do this and make sure you don’t go over that dollar risk amount. How you trade and how well you do in the market depends on how you think about it.
Expectations are important.
Traders often go into the market with a lot of very unrealistic ideas about how things should work. They have wrong ideas about how long it will take to learn how to trade properly, how long it will take to be consistently successful, and how often they will make good trades. When you start something with a lot of unrealistic expectations, you are, to put it mildly, setting yourself up for emotional pain.
Start by reading my recent article on the key to long-term trading success. This will help you keep your expectations in line with how the market really works.
In that article, I talk about how any trading strategy or edge has an equal chance of making money and losing money. Most traders make the mistake of “expecting” to win every trade, but they forget 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 important thing is that you don’t know WHICH trades you’ll lose and WHICH you’ll win.
Given that winners and losers are picked at random, it’s not hard to see why so many traders lose their discipline and patience, trade too much, and end up losing money. It takes a strong mind to remember that one trade doesn’t mean much, but that you have to stay the course and stick to your trading strategy over a large enough number of trades to see your edge.
You must stop caring about trades on an emotional level. In addition to controlling your risk, which we’ve already talked about, you can also do this by controlling what you expect from trading and from your trades.
Simple is better.
People tend to make things harder than they need to be by making things more complicated than they need to be. This is very true when it comes to trading. When you have a trading plan that is hard to understand and messy, it will be the first thing that hurts your trading mindset. When trading, it’s important to keep a clear head and stay calm. To do this, you need a simple trading strategy, like price action.
The hardest part of trading is not analyzing the market and finding key chart support and resistance levels, trends, price action setups, etc. The hardest part is managing risk, taking profits, and managing trades. All of these things will be a lot harder if you are in the wrong frame of mind because you are using a trading method that is too messy and complicated.
So, the first step to getting and keeping the right trading mindset is to start with a trading strategy that is simple but very effective. My price action trading course will teach you how to use this kind of trading strategy. After that, you can keep the right trading mindset by managing your money (mainly by controlling risk, as we talked about above) and your expectations, as we discussed above. If you can do these three things with discipline and consistency: a simple trading strategy (like price action analysis), money management, and realistic trading expectations, you will be well on your way to developing the right trading mindset and, as a result, consistent trading success.
Traders need confidence to be successful. Obviously, if you want to do well at something like trading or sports, where you are competing against other people, you need confidence. And don’t kid yourself, the market and all other traders are your opponents.
In trading, you are even your own enemy. This means that everyone on the market is your enemy, and it really is “you against the world.” In fact, your closest friends and family, who probably don’t know much about trading, may have said things like, “Trading is a waste of time,” etc., in a condescending way.
You can only get through all of this trouble and beat all of the opponents that come with trading if you have complete faith in yourself and your trading skills.
You MUST have the right kind of self-confidence.
The market is full of mine, and if you don’t trust yourself, it can hurt your trading a lot. When traders have low confidence, they often have trouble pulling the trigger, anxiety, stress, and a lot of mental pressure when entering, managing, and getting out of trades. You’ll never make money as a trader if you have a lack of confidence that leads to problems like these, so if you recognize any of these signs, it’s time to take a step back and get your act together or quit the game altogether.
In trading, it’s important to keep in mind that there is a HUGE difference between fake confidence and real confidence. False confidence is easy to get. All you have to do is win a few bets and you’ll feel like a market expert. But be careful, because this confidence is based on luck instead of skill and good trading habits, it won’t last and will likely hurt you more than help you.
Having real confidence comes from knowing how to trade well. The longer you trade with discipline and patience, the more these things will help you and pay off, and you’ll start to see how powerful they are. Over time, trading with discipline and patience (like sticking to your trading plan, not overtrading, and not taking more risks than you know you should) will become ingrained in your mind and turn into good trading habits. Positive trading habits and the knowledge that you are not just relying on luck are incredibly powerful trading “weapons” that will give you real, unbreakable trading confidence.
Here are some tips that will help you feel better about trading.
Tip #1: Use wins to boost your confidence, but don’t be too sure of yourself.
What could boost your confidence more than a successful trade, or even better, a string of successful trades? Be careful, though. Winning trades can and will make you overconfident, which can quickly lead to overtrading if you’re not careful.
But it’s important to think about your successful trades after they are over. In your trading journal, you can make some quick and easy notes about the different parts of the setup you traded and why you think it was a good one. But remember that even a good setup that meets the criteria of your trading plan can fail. Don’t get into the bad habit of thinking that every trade that meets the criteria of your plan will work. Still, you should know what a winning trade setup looks like and use it to remind yourself that you CAN find and make winning trades. This will help you feel more confident in your trading skills and abilities.
No matter how big or small your account is, if you trade on a live account and win, your confidence will grow. Even if you have a lot of money to trade with live, try to get good at trading on a small account first. You shouldn’t just jump into the market with a 50k or 100k account if you’re new or have never traded with a real account before. You should try to start with small amounts and learn how to trade properly first. Then, as you get better at trading and form good habits, you may feel ready to put more money into your trading account in the future.
Tip #2: Use losing trades to learn from them and improve how you trade.
Losing trades can teach you more than anything else. But, just like there will be a normal statistical range of winning trades, there will also be a normal statistical range of losing trades. So, you shouldn’t let your mind trick you into thinking that EVERY trade you lose was a big mistake or that something is “wrong” with your trading method or your ability to trade. This is part of the game we call trading, so you just have to accept these trades and move on, assuming you stuck to your trading strategy and didn’t make the trade out of greed, revenge, or fear (over-trading).
The losing trades that you MUST learn from and that can teach you a lot are the “stupid” ones that you made out of greed, revenge, or fear…
I’m sure you understand what I’m talking about. After the trade is over, you can write in your trading journal what you did wrong and why the trade didn’t work. You can then use this information to help you stick to your trading strategy and plan.
The goal here is to help you avoid making the same “stupid” trading mistake twice. After all, every time you make a trade, your hard-earned money is on the line. As you learn from “stupid trades,” your confidence should grow because you will start to see how important it is to stay disciplined and consistent in trading, and you will start to see that you CAN trade successfully if you just stop making stupid trades.
Tip #3: Act “as if,” even when your trades aren’t going well.
“Fake it until you make it,” as the saying goes, is sometimes the only way to show confidence. Especially in trading, you have to be able to “fake it until you make it,” because at first you’ll be fighting some VERY strong emotional urges and demons that can and will cause you to blow out your trading account if you let them.
You have to be able to leave your computer alone after a trade, whether you win, lose, or get a draw. A professional trader doesn’t sit there and give back all the money they just made on a winning trade. They also don’t sit there and try to “get back” the money they just lost on a losing trade. Instead, they accept how the trade turned out and go on with their lives. They only trade if there is a reason that fits the criteria they have set up for trading. So, if YOU can’t do this on a small account, you won’t be able to do it on a big one either. If you ever want to make a living as a trader, you need to be confident and act like you’re a “super trader.” You need to believe in your trading skills and trading edge. You really do need to trade like a “baller” or hedge fund manager.
In my courses, I try to get my students to trust and believe in the price action strategies I teach them. After all, there’s no point in trading a strategy if you don’t believe in it 100% and aren’t willing to back it up. Instead of asking yourself over and over, “Is this going to work? Should I make this trade or wait?” You should just stick to your trading plan and strategy. So, you immediately get rid of those questions and go back to your trading plan. Then, it’s easy to tell if what you’re looking at is a trade setup that makes sense and is worth taking by seeing if it meets the simple criteria laid out in your trading plan.
When you go to make a trade the next time, I want you to hear my voice asking, “Does the trade make sense and fit the plan?” If it does, have faith in yourself and your edge. If it doesn’t fit the plan, go to the gym, play a round of golf, or take the family out, but don’t trade if there’s no reason to!” There’s no better way to build your trading confidence than to show yourself that you can consistently stick to a trading strategy and trading plan and then start to see the results of your consistency.
“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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