What is a Trading Mindset?
The
markets have no emotions at all, so it’s completely up to the traders how they
perceive the market to be. If your goal in the long run is to attain and
maintain the status of a trader, it’s very important to develop a mindset that
helps you observe the market from an unemotional perspective.
Your
mindset will ultimately define your reactions during losing trades or large
profits – will you be able to stay calm during these events and avoid reacting
based on emotions?
This is what a well-rounded trading
mindset is all about. A disciplined trader will never
let emotions to interfere with his or her trading decisions. However, bear in mind that it takes much effort to achieve
the status of a disciplined trader. You don’t become a professional overnight
in any business, and trading is no different. As one famous trader said,
“… don’t be a hero. Don’t have an ego. Always question yourself and your
ability. Don’t ever feel that you are very good. The second you do, you are
dead.” – Paul Tudor Jones
Why is a
Positive Mindset Important?
As we already said, the market has no emotions at all.
All emotions come from market participants, who are still predominantly humans.
This is why
chart patterns and trend-following techniques work
so great in trading – they rely on well-known patterns of human behaviour and
take advantage of market psychology.
However, you may have heard that 90%
of traders lose 90% of their trading funds within 90 days.
It’s important to ask yourself what are the main psychological traits that
distinguish the remaining 10% of successful traders from the majority of other
market participants.
All of them humans, but a small group of traders still
succeeds to significantly outperform all other traders combined. While it’s
very unlikely that they have found the holy grail of trading, the truth is that
one psychological trait comes very close to it – a trader’s mindset.
1. Control Your Emotions
Emotions play a big role in trading. In an ideal world, there would be no emotions attached to the markets and all traders would analyse trade setups from a completely objective
standpoint. Nevertheless, the majority of traders are
still humans with emotions such as fear and greed, which more often than not
interfere with a rational decision-making process.
Inevitably, there is fear involved with a losing position and greed when a position turns green. Our job as traders is to learn how to control those emotions so that we can maintain a clear picture of the market and make rational trading decisions.
One common mistake that many traders continuously make is
overtrading the market. Especially after a trade goes wrong, some traders feel the urge to chase the market for
trade opportunities, only to accumulate hefty losses by the
end of the day.
This is not how the market operates.
The market doesn’t owe you anything, and it might be a
wise decision to repeat this mantra every morning you wake up. Some days there
are extremely lucrative trade setups, and the other days there might be
nothing.
This point strongly relates to the previous point of
controlling your emotions and having trading discipline. Don’t feel angry at
the market once a trade turns into a loser – remember, the market has no
emotions about you at all.
2. Observe
the Actions of Other Successful Traders
One of the best ways to learn a skill is by observing the
actions of people who have already mastered the skill. Trading is no different
from any other skill, and replicating the process and work routine of other
successful traders can make miracles for your trading mindset.
Finding
a role model among successful traders might be difficult at best, but
fortunately, there are dozens of excellent books that you can pick to get an
insight into the mindset of those traders. “Trading
in the Zone” by Mark Douglas is a classic that every beginner in
the markets should read early in his trading journey. Another exceptional book
which could help you in attaining an effective trader’s mindset is Stephen
R. Covey’s “The 7 Habits of Highly Effective People.”
3. Keep Learning
Education is one of the most important factors that separate successful traders from unsuccessful ones.
Even if you already have the right mindset, you need to
have a solid foundation of the markets to understand the reasons behind certain
price-moves or market reactions. While there are many concepts in trading worth
learning, your best bet would be to keep learning until you find the tools that
best suit your needs and
trading style.
Try to spend at least one hour before bedtime to read a
trading book in order to get an insight into the practices of other successful
traders. In addition, online trading courses are also a great way to increase
your knowledge about the markets.
4. Keep a
Trading Journal and Make Regular Retrospectives
Another great way to attain a successful trader’s
mindset is
by keeping a trading journal. Trading journals are just like regular
diaries – only that they include the trades you make. Journals consist of
journal entries, which can cover anything that you think might be important
about a particular trade.
Standard journal entries include the
currency pair that you trade, the reasons why you got into a trade, its
entry and exit levels, and additional market commentaries. Once you close your
trade, develop the habit to update its journal entry by the trade’s profit or
loss, and any additional comments which might give an insight into the
performance of the trade.
Making regular journal retrospectives can reveal a wealth
of information about your common trading patterns that lead to losing trades.
Maybe the majority of your pullback trades turned into losers? Your trading
journal will show that and help you to improve your trading skills.
5. Get in the Right Trader’s Mindset
Traders can benefit a lot from approaching the market
from a calm and relaxed mentality. If you have proper
risk management guidelines in place, there is no need to worry
about trades at all. In the end, what can go wrong?
Even if a trade hits your stop-loss level, it’s not the
end of the world. Losing trades happen all the time, and even professional
traders have a winning rate closer to 50% than you might think. With a high
enough reward-to-risk
ratio, which is the ratio of your potential profit and
potential loss on a single trade, you’ll still end up in profit even with a 50%
winning rate.
A losing trade doesn’t mean anything personal.
Markets go up and down all the time, and you need to have faith in your market
analysis. Remember, markets don’t have emotions, and traders who avoid
succumbing to their own emotions tend to significantly outperform traders who
let their emotions interfere with their trading decisions.
Having a morning routine may also help a lot to approach trading relaxed. Try waking up earlier than usual, work out or meditate and sit in front of your trading desk with faith in your analysis and risk management principles.
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