Trading is a very psychological endeavor. Dealing with the psychological highs and lows that come with trading success and failure, respectively, has been a distinct challenge in my own trading.
In order to be successful at trading, not only do you need a profitable trading system, you also need to have great understanding and command of your own tendencies and limits as a trader. Absent either of these, trading will likely be very costly and painful for you.
Professional traders know that attitude is everything in trading. Successful trading can make you feel like the king of the world at times. Yet, after a big loss, or a period of drawdown, you may feel like you’re not cut out for trading at all. Professional traders have cultivated a successful attitude for dealing with the inevitable psychological highs and lows that all traders go through.
7 Steps for Dealing with the Psychological Highs and Lows of Trading
Are you committed to becoming a better trader? If so, how do you deal with these psychological highs and lows in your own trading?
Below are 7 things that professional traders do to maintain a successful trading mindset:
1. Manage Your Money Wisely – Good money management is critical to the success of any trading system. Professional traders know that you should only risk a small amount of your account each trade. Most professionals only risk 1-2% per trade. Very expert traders that use a trading system with a very high strike-rate might risk 3% per trade.
You might risk a little more in the stock market as well, but the point is that you should be risking a relatively low percentage of your capital per trade. It takes a little longer to reach your monthly goals that way, but this technique eases the pain when losses happen. And you will have losses.
If you’re very good, you might have perfected a trading system that wins 80% of all the trades that you take over a large sampling of trades. In that scenario, you still lose 20 trades for every 100 trades that you take. Average traders win much less. You must be prepared to protect your hard earned money. Risking a small amount of it per trade is a good start.
2. Do Not Overtrade – Average and losing traders tend to trade too much. They often trade for the fun. They don’t like to be out of the market. Professionals know that the only advantage that retail traders have over institutional traders is that retail traders don’t have to be in the market all the time.
Successful traders trade less often and consistently make more each month than the “active” traders. Successful traders have the patience to wait for good trades to come to them. They wait for “all the stars to align” before getting into the market.
3. Do Not Revenge Trade – Revenge trading is jumping right back into the market to recover a loss you recently took. Overtrading and revenge trading will kill your trading account faster than anything. Always take the best setups your trading system offers, and when you inevitably take losses, realize that losses are just a business expense in the business of trading.
Trading is hard enough to do when you don’t make any mistakes. The last thing you need to do is jump right back into the market just because you took a loss. Wait for the good ones. Don’t needlessly give your money away with costly mental mistakes.
4. Log your Trades in a Journal – This is so key to becoming a better trader, as well as having the right mindset to get you through the drawdown periods. Keeping an accurate trading journal isn’t going to turn everything around for you if you still haven’t found a good trading system, or you haven’t had the patience or discipline to follow the rules of that trading system. However, once you have a good system, a trading journal is a must.
This is true for many reasons. A detailed trading journal, when reviewed at the end or the week, month, etc… can show you what you’re doing right and what you’re doing wrong. It allows you to determine if it’s you or your trading system that is causing losses. Are you sticking to the rules or forcing trades? How many mistakes did you make (how many times did you break the rules of your trading system)? How much would you have made if you had followed the rules with discipline? What kind of trades are you losing/winning on (buy/sell, breakouts/news trades, swing trades/scalping trades, etc…)?
If you are trading multiple systems on one account, the way many traders do, you need to know how each system (or which setups within each system) is performing. You cannot get any of this information by just totaling your monthly profit or loss. All of this information will help you tremendously, not only in becoming a more successful trader but also in keeping the right mindset when you have a losing period.
5. Do Not Overcomplicate Trading – The majority of traders lose. Don’t get caught up taking random trading advice from lots of traders. There are tons of forums and websites available where there are no shortage of self-proclaimed experts telling you how you should be trading, or what’s missing from your charts. Most of these places will only lose you money, and make you feel more lost than when you first started out.
Trading doesn’t have to be complicated. The natural tendency is to make trading more complicated because it’s easier to blame your charts, experts, trading methods, etc… for your lack of success than to actually find out what YOU are doing wrong. The complicated part of trading is the psychological aspect. Your trading system, itself, can be as simple as a naked chart showing candlesticks (price action).
Find something that works for you and stick with it. Many new traders jump ship or add/subtract rules from their trading system(s), at the first sign of losses. The point is to find something that makes sense to you, prove that it works, and then let the edge that it provides you play out over time.
6. Demo or Paper Trade – Even if you’re already a successful trader, anytime you introduce a new technique to your methodology, you should always demo trade or paper trade the new technique for, at least, a few of months. There are several benefits to doing this.
In order for any trading system to work for any trader, two things have to happen: 1, your trading system must be a truly profitable system with consistent results; 2, you must truly believe in your trading system. Demo or paper trading can accomplish both of these things for you.
If your trading system is truly profitable, you should see consistent results over a period of, at least, a few months. If you do, you will have proven to yourself that your trading system works, and you can truly believe in your trading system. This will be invaluable to you for keeping you discipline after losses, or when long periods of drawdown in your system occur.
The transition from demo trading or paper trading to live trading is not as smooth for most traders as they might assume it would be. Growing up broke, like I did, only compounds the issues. Many traders get nervous or uncomfortable with real money on the line, and that can lead to poor decision making. Proving your trading system is profitable first, before risking any of your hard earn money, can help you see that money as capital in a profitable investment.
7. Focus on Your Trading System – If you’ve proven that your trading method is a winner, and that you have the patience and discipline to execute it correctly, then you just have to take each trade as mechanically as possible. This will help you take some of the emotions out of your trading.
I realize that not every aspect of every trading system can be completely mechanical, but you should strive to execute your trading system as mechanically as possible. If a trading setup occurs that meets all of the rules of your trading system, that’s a valid trade. Take that trade – even if it’s ugly. If a trading setup occurs that doesn’t meet those same requirements, that’s an invalid trade. Don’t take that trade – even if you’ve been waiting so long for a setup to occur, and even if you’re down for the month, and even if it’s the last trading day of the month. Stick to your rules. Be mechanical.
Realize that no system is capable of catching every move the market makes. Don’t get caught up in thinking about how many pips you left on the table by missing that breakout. Focus on what your system is providing you. Stick to it, and let your edge play out over a large sample of trades.
Trading can be Simple but is Always Stressful
Trading is one of the easiest – if not the easiest – ways to get started in your own business. It can be extremely simple, and yet, it can also be one of the hardest, most stressful things you’ll ever try to do. So what is the key? Why do some traders make it, while the majority of traders fail?
Emotion plays a huge role in trading. Not everyone can deal with the psychological highs and lows that come along with putting your hard earned money at risk. Letting your emotions dictate your trading experience will be disastrous for you. Unfortunately, there are more moving parts to successful trading than just the psychological aspect; however, if you can minimize and control these emotions, you have a much better shot at success.
Taking the steps I mentioned above will help to keep you trading through the hard times. These steps will help you trade more mechanically, and less emotionally. As unnatural as trading can feel from time to time, there are many reasons to stick with it. Trading can be a great business to go into if you can handle the stresses involved. Hopefully, these 7 steps will help you deal with the psychological highs and lows in your own trading as much as they have helped me in mine.