Most experts agree that one of the most important aspects in achieving consistent trading success is developing a profitable trading mindset. You can appreciate the relevance of developing your trading mindset by comparing the differences in how novices and experts mentally evaluate trading.
To become consistently profitable in your own trading, you not only need to develop a winning trading system, but you need to start thinking like an expert trader. In order to develop a profitable trading mindset, you must first understand how novice traders fail in this aspect.
How Trading Novices Think
To kick this lesson off, we need to establish a sort of baseline of bad trading psychology. The following list identifies the most common psychological downfalls of the novice trader:
1. Novices do not really understand how to implement the tried-and-true trading maxim which states “let your winners run and cut your losses.” Consequently, novice traders register significant losses over the long haul.
2. Many novices become addicted to trading, and subsequently, start treating their trading as just another form of gambling.
3. Beginners sometimes feel that they do not control their trading. Instead, they just hope for success, often saying things like, “You can’t beat the market.” This attitude can prevent them from systematically eliminating weak points in their trading, or from using a scientific approach to finding a good trading plan.
4. Novice traders often develop fears that the market or their brokers are victimizing them, especially after they have endured a bout of consecutive losses. They may begin to think that, no matter what actions they take, they will endure further significant losses, instead of addressing the real issues responsible for their declining trading account balances.
5. As novices often use borrowed money or money that they simply cannot afford to lose to fund their accounts, they subject themselves to intense stress.
6. Even when beginners do win, they do not know how to deal with their profits very well. They tend to become overconfident, and consequently, start overtrading. This generally leads to serious losses, or at least giving all of their profits back to more disciplined traders.
7. Novices do not know how to evaluate their own trading strategies, if they possess any at all, effectively. It’s easy to think you are doing well after a few wins. It’s human nature to forget, or try to forget, about the bad results.
8. Beginners do not understand how to master their emotions, allowing hysteria and gut feelings to dominate their trading decisions. This is one reason novice traders are known for chasing price and not letting their winning trades develop.
9. They become consumed by fears of failure after trading for some time. This can lead to analysis paralysis, or even a fear of pulling the trigger altogether.
10. Most trading novices have not mastered the concepts of risk and money management. They typically risk more then they can comfortably lose, and their anxieties can make them trade irrationally.
In order to develop a profitable trading mindset, novices must strive to eliminate the failed thought processes that plague just about 95% of all traders. Few traders are able to get past these psychological hiccups, because humans beings are simply not wired to think in terms of risk.
Most of us think in terms of hording, when it comes to making money. Understanding this, it is easy to see how an investment vehicle that guarantees at least some losses can be hard to deal with. It helps, however, to peek into the mindset of traders that have already overcome these mental hurdles.
Thinking Like An Expert Trader
How can developing a profitable trading mindset really help you? To answer this question, study the following list that identifies many of the most important attributes of the type of trading mindset that is invaluable to expert traders:
1. Expert traders maintain an open mind to their trading activities – as opposed to being dogmatic. The market is dynamic, and strategies must be tweaked or augmented at times.
2. Profitable traders learn from the trading experiences of others, but never mimic. They are interested in what works, what doesn’t, and why. They know that much of this can be learned from other trader’s experiences, but that they are ultimately responsible for their own success.
3. Most expert traders utilize the power of the trend, although there are some exceptions (like countertrend trading). Even scalpers understand that their trades have a higher probability of success if they are taken in the direction of the trend.
4. Successful traders understand that, not only wins, but regular losses as well, are all just a part of the trading game. Knowing this, well-rounded traders can take small losses in stride – knowing that they will bounce back when the time is right.
5. Expert traders enjoy trading, because it does not cause them much, if any, stress. They view trading as a capable long term investment vehicle – not a gauntlet from which their trading capital must pass through on a trade-by-trade basis.
6. Successful traders aren’t in a hurry. They have the patience to sit on their hand for hours, days, weeks, etc… (depending on what type of trading they are doing, e.g., daytrading, swing trading, or investing). They are uncompromising when it comes to waiting for the right setup.
7. Consistently profitable traders know when to seek new education to improve or augment their skills. Whereas novices continually seek the “holy grail,” and thus overload themselves with half-grasped trading techniques, expert traders perfect each new skill before moving on to the next one.
8. Experts truly understand and implement risk and money management concepts. As such, they never worry about their equity, because they know it will be well protected.
9. Successful traders set realistic trading goals. They understand that slow and steady is almost always the best approach to trading. Therefore, they are not drawn into overleveraging their risk or overtrading.
10. Profitable traders know how to tweak and calibrate their trading strategies with objectivity. They keep disciplined records of every trade – noting the circumstances and techniques used for each one. Over time, they can objectively determine what needs to go, what’s worth keeping, what needs to be tweaked, etc….
Achieving the mental nirvana of a profitable trading mindset as described in the last list is definitely a target worth striving for, because an expert trader’s mindset is a place of profitability, tranquility, and harmony.
Benefits Of Developing A Profitable Trading Mindset
Experts agree that the mindset with which you approach trading will have a strong influence over your ability to trade successfully. Successful trading requires a psychologically disciplined person, because you must be able to deal with many different emotions and pressures that the market will throw at you.
Having the right mindset will keep you from trading based on emotions, and will help you cope with the inevitable losses that you will encounter. It will help you approach your trading in a scientific way – allowing you to preserve your equity and improve yourself where you are deficient. It will help to lower your stress level while trading, and ultimately lead to a much more enjoyable trading experience.
You should free yourself of any pre-conceived ideas of attaining fast profits, and instead focus on learning how to trade with a profitable trading mindset and sound trading techniques from the outset. You must be willing to put in the time and effort into developing your trading mindset, as well as your trading strategies. When you take care of these important aspects of your trading first, the profits will come.