The Trading Mindset (Trading Psychology)

The Trading Mindset
(Trading Psychology)

Now what does Psychology or your mindset have to do with trading? You might not believe it, but it has a huge amount to do with it - ask anyone who has been trading for a little while.

Trading boils down to three main areas - your Mindset (or psychology), your Money management (how you manage your risk) and the Method you use to buy and sell (your trading system). The three Ms!



Of those three areas, your mindset and your ability to control it are by far the most important! The key is that your mind drives everything you do in your life and trading is no exception.

"There are no limitations to the mind except those we acknowledge."
Napoleon Hill (1883-1970)
So it begs the question, doesn't it? What is it that separates the successful from those who fail? Why are most people who start trading unsuccessful yet there is this small group of people who are successful?

If you ask anybody who has studied trading for any period of time, they will answer ‘psychology’. Essentially, your mental ability to manage losses and profits and the good and the bad times in trading, manage risk, to not become too greedy and many others are all encapsulated under the heading of ‘trading psychology’.

OK, let's accept that your mindset is crucial to your success. Your Mindset - what does that mean? Often it comes down to you as a person and your character attributes - what are your strengths and weaknesses? Are you a level headed person / are you highly emotional? Are you disciplined and willing to work hard to achieve results? I hope so ...

Let's look at some character attributes for a moment (there are a few of them).

There is one overriding influence on your trading success and that is your attitude. I believe that your attitude will determine whether or not you are profitable with your trading. Your attitude is more important than any of the character attributes required for successful trading; it is more important than your market knowledge and your degree of skill.

I am inspired by the following quote and believe it is applicable to trading.


"The longer I live the more convinced I become that life is 10 percent what happens to us and 90 percent how we respond to it."
Charles Swindoll
It is not important what the market does to you, it is how you react to it that is important. For example, it is not important that you are faced with yet another losing trade, what is important is how you react to that situation. Do you get upset and allow your emotions to cloud your judgement or do you react calmly accepting that loss as a part of trading, and move on from the experience.

Swindoll's words are true when applied to anything in life, yet I don’t think many people would consider how powerful that statement really is.

I think one of the most underestimated attributes of successful traders is patience. Patience is a factor in a number of different situations in trading from trade entry, to trade management and your expectations.

One of the most important attributes (in anything in life really) is self-confidence. Self-confidence is a measure of your belief in yourself, and has a number of consequences in trading should you lack it. Essentially, being successful requires you to trust and follow your trading plan. If you lack self-confidence, then you are not likely to trust and follow something you have developed.

Confident traders rely on their own methodology and not what others are saying. In line with this, I think it is important to never give tips and moreso, never listen to them.

I think the best advice when talking about trading to others is to keep your mouth shut about your own positions.

Emotions are probably the single biggest problem we face when trading (along with a lack of discipline). Trading the market is like running a business and anyone who has run a business successfully will tell you that emotions should have little place in your decision making.

Trading successfully is all about decision making, although because of money and our natural instincts, many people cannot remove their emotions from their decision making process, sufficiently.

Further to decision making, it might be worth considering the importance of being decisive and disciplined with your decision making and importantly, focussing on the right areas. Too many people expend too much energy worrying about the wrong things.

How much control do you have when you are trading and over the markets? There are various parts of a trading plan which are easy to control however just as many that are quite difficult if not impossible to control.

One of the first problems that many people face is that of unrealistic expectations. This can make you come unstuck very easily. What makes people think that they can start trading one day and be super profitable from day one is beyond me. Yet, some do.
"The dictionary is the only place where success comes before work. Hard work is the price we must all pay for success."
Vince Lombardi (1913-1970)
Once they realise there may be some work involved, many search for the holy grail of trading. The Holy Grail is often referred to in trading circles as the perfect trading system; the perfect conditions or indicator that will guarantee success in every trade you enter.

The reality of trading is that there is no such trading system in existence. It never has existed and never will.

"How to succeed? Try hard enough."
Malcolm Forbes (1919-1990)
It all sounds a little difficult, doesn't it? It shouldn't be ... I believe anybody can achieve anything they set their mind to. So can you!



Let's quickly review what successful traders really do ... let's look at the winning factors. There are a number of specific factors that assist winning traders and that losing traders don’t consider. Winning traders focus on the right things - things that matter.

Another problem that people can have is to take trading too seriously. The problem here is that the individual will feel the weight of the world on their shoulders and crumble under the pressure. It is very important that you always maintain a clear mind and perhaps consider trading like any other game or sport.

A very positive thing you can do is occasionally schedule a break from your trading. Sometimes trading can be quite stressful and other times it may appear as if you can do no wrong.

These emotional swings and emotional stresses do impact on your mental state and can ultimately affect your trading decisions.

We focus so much on what can go wrong (I think it is important to do so as to avoid making the same mistakes). however when things do go well, you should certainly reward yourself for it.

In some way, reinforce to yourself that you have had a great trade and have followed your trading plan to the letter in doing so. It helps reinforce the positive and instill in you that good things can happen when you follow your plan.

Another key consideration when preparing yourself to make your own trading decisions is where you are going to make your decisions. For example, are you going to be trading from work, or in the home office? Where are you going to be more focused? This is important because you need to be able to reduce the effects of any possible distractions, but also eliminate the influence of how you are feeling.

This would be especially relevant if making your decisions at home where distractions could potentially be numerous. It is important that you are relaxed and able to focus when you sit down to review your positions and to identify potential trades.

Books like ‘Market Wizards’ by Jack Schwager and other similar texts illustrate how successful traders have found a trading methodology that they are very comfortable with. None of them have found any magic solution to trading but they all clearly possess an inner confidence in their own ability to follow rules and their own trading plan.

To develop a solid trading plan requires commitment and discipline, but more importantly time to sit down and work through it methodically. At the end of the day, if you are not comfortable with the way you approach the market, then you will likely drift away from your plan and fall into bad habits. In this situation, it is highly probable that you will lose money.

If you want to trade well and therefore develop a trading plan and follow it, you need to convince yourself that it is something you really want to do. Commit to it and there really shouldn’t be anything stopping you developing a robust trading plan that will over the long run be profitable.

Do you have a trading plan? Have you fully committed yourself to following it?




Why Do Traders Fail?

It is widely accepted that most traders are not suucessful. Yet, there is this small group who are consistently profitable year after year. How do they do this? How do they get themselves into this enviable position of being able to make money trading regardless of which direction the markets are moving?

An interesting observation can be made about traders generally either following or not following the rules. It is widely accepted that there are no secrets to what makes a successful trader and the rules that have stood the test of time and do work. Yet most people fail to follow them. Why?

Interestingly, many studies suggest that humans are naturally inclined to fail at trading. People are naturally inclined to break all of the time tested trading rules. Probably the biggest reason for not following the rules is that people generally do not like to lose. Nor can they bring themselves to accept that they are wrong.

As an example, there may be a certain type of person who is very confident in themselves and their own ability at different ventures, and this attitude and confidence naturally carries over to their trading.

This potentially is a problem because there will be many occasions when a trade they enter does not head in the anticipated direction. The time tested rule of ‘cutting your losses’ would be most applicable however for those who have strong self-confidence may find it difficult to close the trade at a loss because doing so acknowledges that they got the trade wrong in their own minds.

This may be a difficult situation to digest so the easier option will often be to not close the trade at a loss and therefore violate probably one of the most important trading rules there are. To most traders, the idea of not closing a trade at a loss means that they haven’t had a loss despite the fact that they may have a large unrealised loss.

Money is something that affects people’s emotions and your natural instincts with money will often encourage you to break some of the time tested risk management rules, for example ‘cutting your losses’ and ‘keeping your trades small’. Most traders focus on making money and realising a loss goes against the aim of making money.

Similarly, when you have a position that is performing strongly, a small part of you wants to sell that position to realise the profit. This is perfectly natural. Letting your profits run and not selling too early is also an important time tested rule, however because of the focus on money, some people can be very quick to sell shares when in a profitable situation.

If you find it difficult to accept an initial small percentage loss in a trade, what makes you think it is going to be easier later on to sell the shares when the position has lost 30% or more? Yet, when you consider the influence of trends in the market and how important it is that you manage risk, the best time to sell the shares is when you are faced with only a small loss.

Thoughts often appear about holding on to shares that are falling in value because one day in the future, they will increase in value and return to the price that you purchased them at. This is unfortunately a myth that many people have about shares in the market.

Some people believe that shares will always return to previous values, presenting them an opportunity to sell them at break even. There is a chance that the share price will never return to the price you bought them at.

Furthermore, whilst you may have absolute confidence that a share price will return to levels that you purchased them at, consider if it is worth holding on to them and waiting for that time to come, if it does. Would it not be better to sell those shares and move on by committing your trading capital into a company whose share price is clearly trending up at the present time?

Often people will think about how they will feel if they sell shares and in 12 months time, the share price returns to where they purchased them. There is a feeling of, ‘I should have just held on to them’. Meanwhile however, over that 12 month period whilst you may have been waiting for the share price to return, your trading capital was elsewhere obtaining solid returns for you.

All of these emotions and others can paralyse you and force you into not making a decision. Remember the old adage that says that taking no action is an action. Successful trading is all about sound decision making and you need to ensure that some of these emotional impulses do not freeze you or cloud your judgement.

The bottom line is that humans are naturally inclined to break the time tested trading rules. If this is the case, then those who do succeed trading are totally committed to their trading and are able to focus on the task at hand. They are able to exercise great internal control and discipline and do as their trading plan would have them do.

If you were to isolate the reasons why people do not follow the rules, you would most likely conclude that it is a lack of discipline and involving too much emotion in the decision making process.


Patience

So what is it that separates the successful from those who fail? If you ask anybody who has studied trading for any period of time, they will answer ‘psychology’. Essentially, your mental ability to manage losses and profits and the good and the bad times in trading, manage risk, to not become too greedy and many others are all encapsulated under the heading of ‘trading psychology’.

There are also a number of character attributes that successful traders have to include discipline, commitment and motivation. An often overlooked and underestimated character attribute is patience.

Patience is a factor in a number of different situations in trading. First, considering a potential trade requires patience. You may be considering a trade and conducting your analysis, weighing up the various criteria you normally use.

For example, you may be analysing a chart and identify an ascending triangle forming with the top of the triangle positioned at $1.00. The security may have closed at $0.94 the previous day and you are now considering an entry based on the reliability of the triangle pattern.

Part of you wants to enter the trade now at $0.94 while another part of you suggests that you wait for the security to break the top of the triangle at $1.00 and then enter. Which approach is correct? On one hand, you purchase the security at $0.94 and enjoy more gain than should you purchase it at $1.00 however you have no certainty that it is going to trade beyond the present resistance level.

On the other hand, you have purchased the security at a higher price (just above $1.00) however with the certainty that the resistance level at $1.00 has now been broken and is likely to now become a support level for the near future.

The second approach may be the wiser approach and likely to be more profitable in the long run however a degree of restraint is required to follow it. A trader needs to be patient to wait for the $1.00 level to be broken as opposed to entering the trade now and purchasing the security at a cheaper price.

Sometimes when you enter a trade, there is a sense of optimism that this will be the one that makes your year. The analysis may have been thorough and the security met all of your criteria. Then after you enter the trade, it moves very little in the short term after. Due to your thorough analysis and optimism, you may have subconsciously set an unrealistic expectation for this trade. When in the immediate future after entry, it fails to meet those expectations, you may get frustrated and close the position in disappointment, even though it may still be meeting your entry criteria. Patience is required in this situation.

Another problem that some traders face is even when they set themselves a realistic goal of 20% per year for example, they then expect to achieve that return in the first few weeks as opposed to taking a longer term view over the 12 months. 20% per year is only just over 1.5% per month yet some traders will expect to achieve that quickly and may adopt some poor trading habits. Patience is an important character attribute that traders need.


Confidence

Numerous character attributes are often listed as being important for an individual to achieve trading success. One often overlooked is self-confidence. Self-confidence is a measure of your belief in yourself, and has a number of consequences in trading should you lack it.

When starting out to trade, it is important that you objectively assess your level of self-confidence, as being successful requires you to trust and follow your trading plan. If you lack self-confidence, then you are not likely to trust and follow something you have developed, but worse than that, you may be influenced by someone else’s opinion of a stock. Has anybody given you a red-hot tip about a stock before? What did you do? Did they also tell you when to sell it? How did it perform?

In his book ‘Reminiscences of a Stock Operator’ (a fictionalised biography of one of the greatest market speculators, Jesse Livermore), Edwin Lefevre mentions how destructive tips can be to one’s trading. This is coming from a book that was first published in 1923 and is one of the most highly regarded financial books ever written. Back in 1923, tips were considered disastrous, so what makes you think that tips you hear today will be any different? Trust yourself and have confidence in your own trading plan.

When developing a trading plan, it is important that you develop all the steps yourself. By doing this, you will know and understand the logic behind each step in the approach. Should you conduct extensive backtesting, this will also provide you confidence in the approach when it comes to implementing the plan. This confidence will also provide you the discipline to follow the plan.

Furthermore, this confidence and discipline will be vital when it comes to trading the plan with real money.

One way we can also increase our confidence is knowing that we have adopted sound risk management rules. A simple stop loss set when entering a trade should provide us the confidence to enter the trade in the first place. The stop loss prepares us for what potentially will be the worst outcome in the trade, notwithstanding the potential for far great loss.

Confidence is believing in yourself to do what needs to be done. It is a measure of your faith in your ability to do something. It is often suggested that successful people are not afraid to fail. In fact, a lot of successful people have failed along the way to success. However, they all have the ability to accept their failures and move on. They understand that failure is often a natural consequence of trying.

It is important that when you trade with a plan that you have developed, that you do so with a positive attitude and with confidence. As soon as you start to think about missing trades or thinking that the next trade is going to be a loss, it is probably time to review your trade or your own level of self-confidence.

Finally, one thing that will help with your confidence is your own knowledge and understanding of the markets, the products you are trading and various tools you use in your decision making. Competence yields confidence. If you are not competent at something, it is highly unlikely that you will be confident doing it.



Keep Your Mouth Shut

In numerous traders clubs and forums, you will often find people who routinely disclose what positions they have and why. Often, the intentions of these people are innocent in that they want to help others to discover an approach that is going to work for them. They want to teach the recipients and empower them to learn more about trading.

Sometimes, the person disclosing the information may have other intentions however there is always the chance that this could have a detrimental effect on the person disclosing the information.

They need to be careful that they don’t start believing too much in their position just because they have disclosed it to others.

At the best of times, taking losses can be difficult. It is probably the most single identifiable reason why traders fail. Taking a loss means that you must accept that you got the trade wrong and this can be difficult for a lot of people. Now that you have disclosed your trade to a group of people, it can make it even harder to accept that you were wrong and therefore close the trade when you should.

Advocating the trade to others instills in you the positives of the trade and these may eventually subconsciously influence your decision to not exit the trade.

Traders should avoid discussing their open positions and their opinion on various potential trades because it may affect their objectivity when in that position themselves and make it harder to take a loss, even when that is their best course of action.

Confident traders rely on their own methodology and not what others are saying.

If you make a habit of discussing your open trades, there is a chance it will end up costing you money, especially if you repeat your opinions often enough, in that you might actually start believing what you are saying.

The same goes with tips. A common rule is to not give nor listen to tips. A trap that you can easily fall into with a tip, can occur when your position starts to move against you. You are more inclined to break the rules and not cut your loss because of the ‘reliable’ information you have heard about the security’s future.

Have confidence in your own approach and never worry about tips of any nature regardless of whom they are from.

When you give a tip, and the position moves against you, it is possible to feel some obligation to stay in the trade because of the relationship you have with the person you gave the tip to.

It is unlikely that you could face up to the person one week after the position was entered, and tell them that the tip is no good and they should exit.

In his book ‘Reminiscences of a Stock Operator’ (a fictionalised biography of one of the greatest market speculators, Jesse Livermore), Edwin Lefevre mentions how destructive tips can be to one’s trading.

This is coming from a book that was first published in 1923 and is one of the most highly regarded financial books ever written. Back in 1923, tips were considered disastrous, so there is no reason to think that they are different today.

Trust yourself and have confidence in your own methodology



Emotions

Often when people talk about the importance of psychology, the need to be as unemotional in your decision making as you can be is frequently mentioned. Decisions are required often when trading and a fair percentage of the decisions that are required will be difficult.

Humans are naturally inclined to break the time tested trading rules and this is why your psychology and decision making are such a vital part of your success. Successful traders have great internal control and discipline to overcome the natural tendencies.

Trading the market is like running a business and anyone who has run a business successfully will tell you that emotions should have little place in your decision making. Trading successfully is all about decision making, although because of money and our natural instincts, many people cannot remove their emotions from their decision making process, sufficiently.

This is essential however. If your emotions have a great influence on your decisions, the chances are you will break the time tested trading rules. You will be inclined to not cut your losses and not let your profits run, for example.

To develop a trading plan and to then follow it requires some time tested character traits that lead to success in any endeavour such as commitment and discipline. These attributes will help you eliminate as much as possible the influence of your emotions over your decision making.

Developing a trading plan will also greatly assist as it will provide you something tangible to base your decisions on. Without a trading plan, you have nothing to base your decisions on except how you feel, which is largely governed by your emotions at the time.

One final thought about your emotions. If you buy something and it doesn’t move in the direction you were hoping, don’t get upset. Understand that it is a normal part of trading. Getting upset about it is not going to achieve anything, especially moving the share price back in your favour.

If anything, it will only cloud your judgement when making future trading decisions and potentially do you more harm than good.

Your emotions are a part of who you are and your decision making process. Decision making is a large part of trading, as you need to make decisions often and many of them are difficult decisions. Furthermore, people like to break rules, even ones they set themselves.

There are some simple trading rules that have stood the test of time, and will always work yet most people cannot follow them. It is essential that you realise how important it is that you demand of yourself the highest level of discipline to ensure you implement the requirements of your trading plan ruthlessly and follow some of the time tested trading rules.



Decision Making

Many consider that there are only a handful of vital elements to successful trading. Whilst psychology is the most often suggested item as being the most important, it covers a wide range of different things. Many would suggest that ‘your psychology’ is what will make or break you as a trader.

Essentially, your mental ability to manage losses and profits and the good and the bad times in trading, to manage risk, to not become too greedy and many others are all encapsulated under the heading of ‘trading psychology’. Interestingly, many studies suggest that humans are naturally inclined to fail at trading. We are naturally inclined to break all of the time tested trading rules.

One of the items also covered under ‘psychology’ must be decision making. Trading is effectively all about decision making. Before you even start trading, you need to decide on simple things like your goals as well as what taxation structure you will trade through, for example.

Then you decide upon your selection criteria for potential trades, how you will size your trades, whether or not you will include derivatives in your trading or whether you solely trade equities, and how you will exit your trades at either a loss or profit.

The vast majority of these decisions are important and can adversely affect your overall success if they are not sound decisions and supporting of each other. For example, if you trade medium term yet employ tight stops that are better suited to short term trading, you are likely to exit well over half your trades at a loss even though the security may eventually continue to head in your anticipated direction.

The method of stop loss positioning was not suitable for the selection process you were using.

Another example might be to use a medium term approach for your selection process however then use exchange traded options with only a few weeks until expiry to trade with. The expiry of the options is very likely to impact on your decision making before the medium term outlook for the underlying security eventuates. For those who are generally indecisive will most likely face extra challenges in becoming a successful trader.

Decisions are required often when trading and a fair percentage of the decisions that are required will be difficult. Humans are naturally inclined to break the time tested trading rules and this is why your psychology and decision making is such a vital part of your success. Successful traders have great internal control and discipline to overcome the natural tendencies.

They will likely cut their losses when deep down they don’t want to because they don’t want to lose money. They will likely stick with their position sizing model even though they feel super confident about a particular trade selection. Trading is all about decision making and successful trading is all about sound decision making based on the foundation of a solid written trading plan.


Decisiveness and Discipline

Trading is primarily decision making. It is not physically demanding nor do you have to remember complex formulas and concepts. It is just decision making. You are presented with or you acquire information for analysis and make decisions based on that information and your judgement. As trading is essentially decision making, you have to be decisive to be successful.

A fair percentage of the decisions that are required will be difficult. Humans are naturally inclined to break the time tested trading rules and this is why your mindset and decision making is such a vital part of your success. Successful traders have great internal control and discipline to overcome the natural tendencies.

They will likely cut their losses when deep down they don’t want to because they don’t want to lose money. They will likely stick with their position sizing model even though they feel super confident about a particular trade selection. Successful trading is all about sound decision making based on the foundation of a solid written trading plan.

With regards to decision making, there is one thing I learned from my military experience which I think is quite applicable to trading. As an Army officer, you are also often faced with situations where decisions need to be made. When faced with a situation where a decision needed to be made, you often considered a number of different courses of action.

One thing was for certain. The easy option was rarely the best option.

The easy option is the decision that is the easiest to make. It was the one that caused the least discomfort, inconvenience and was likely to be the most popular with my subordinates. This was rarely the best option.

In trading, you will often be faced with difficult decisions that need to be made with probably the most often being to cut a loss. When faced with a loss, the easiest option is to do nothing about it and hope the trade rights itself.

I can assure you that this will never be the best option. You could argue that sometimes, the trade will right itself and the decision to not cut the loss will result in a profit. This is true but it only reinforces the negative and will lead you into bad habits.

An easy way to ensure that you always do as your trading plan demands of you is to consider yourself an employee of somebody else. This other person has employed you to trade their plan for them. The plan is not difficult to follow and it is not beyond your intelligence to follow the rules within the plan.

There is only one condition.

If you do not follow the rules, you will lose your job – no questions asked. Sounds like a simple job. Do you think you could successfully hold onto this job if all you had to do was follow the plan? I think I could ...

I think this little mental preparation could help many traders who are not following their plan. Next time you make a decision, pretend your boss is looking over your shoulder and see what happens.



Focus

A point about preparing your mind for successful trading is to focus. Focus on the right things and the things in your trading plan that are important.

As an example, a few years ago, a colleague and I were running a full day course where we both presented on different topics throughout the day and the attendees could decide which presentations they attended. As the day started, the group split themselves quite evenly to listen to the two separate presentations.

This even split continued throughout the morning as people moved between the two seminar rooms between breaks and maintained a fairly even split.

After lunch, the first two presentations were on industry sector analysis and money management. The group split themselves up again however this time, 80% of the people went into the seminar room for the presentation on industry sector analysis and the remaining 20% entered my seminar room for my presentation on money management.

Before I started my presentation, I said to my attendees that this another reason why most traders fail. 80% of the group thought that industry sector analysis was more important than money management and therefore decided to listen to that presentation.

There are not too many more important things than money management and industry sector analysis, which was designed to help them with their entries, is certainly not one of them.

The lesson here is to focus on the right things. Don’t focus too much on your entry signal, as most people do. Keep it simple and then move onto the more important areas like position sizing, setting exits and preparing your mind for successful, disciplined trading.


Take Control

Have many traders actually thought about how much control they have of their trading? Trading is decision making based on various conditions that lead to the range of emotions that humans can experience from exultation to despair.

You could argue that there are various parts of a trading plan which are easy to control however just as many that are quite difficult if not impossible to control.

The point at which where we can exercise the most control is at the point of trade entry. It is here where we can measure the various tools and indicators that we use in our analysis and decide whether or not to enter the trade.

It is here where we have the maximum control in being able to not enter the market because the conditions are not right based on our trading plan. Consequently, you could suggest that trade entry is an easy part of trading as we have maximum control, and can decide to do as we want.

For those who have extensive entry lists that they check off as they evaluate a potential trade, they would exercise more control than those who have very simple entry criteria. They would be more selective and if the market didn’t present the exact conditions that they wanted, they simply would not trade.

The situation changes completely when the trade is entered however. As soon as the trade is entered, countless possibilities arise and most of which cannot be controlled.

This is an interesting situation that confronts all traders.

Even though you may have exercised great control in deciding to enter a trade or not, you now have lost a great deal of control in what happens. Individual traders simply just can’t control what happens in the market.

A trader must now be prepared to react to whatever the market does. The market does not care that you exist nor does it care that you have a trade open. It is the market that is now in control.

The market can do whatever it wants and these possibilities are endless. Your security could halve in price, all the volume may dry up, it could reverse on you, gap down, or more frustratingly, move nowhere and establish a sideways trading range the day you enter.

When you are faced with a losing trade, you have a fair amount of control. You could follow the time tested trading rule of cutting your losses and just exit the trade. You can generally control how much you will lose in a trade should it not move in your anticipated direction.

Interestingly, the same cannot be said for profits. Although you can generally control the size of your losses, you really have little control over the size of your profits. Should you have a $1000 profit, you have no control over whether it becomes a $2000 profit. You do however have control over protecting profits.

Within your trading plan, there are components that you have control over and those which you have little or none. It is important that you maximize the control that you do have to your advantage.


Be Realistic

Unfortunately for many people who take up the endeavour of trading, they end up losing money. This is despite the existence of many reputable share trading education companies, an abundance of trading books available and the presence of solid trading rules that have stood the test of time. These rules are not secret to anyone either – almost any book will refer to some of them. Yet despite all this, many people still find it difficult to achieve long term profitable trading.

So what is it that separates the successful from those who fail? If you ask anybody who has studied trading for any period of time, they will answer ‘psychology’. Essentially, your mental ability to manage losses and profits and the good and the bad times in trading, manage risk, to not become too greedy and many others are all encapsulated under the heading of ‘trading psychology’. There have been numerous professional articles and books written on the subject of ‘the psychology of trading’ and therefore this article is not intended to elaborate any further on an already well debated and discussed topic, except for one area. One thing that many people struggle to come to terms with is their expectations of their trading. Too many people have unrealistic expectations and expect to make triple digit returns consistently, for example.

Having high expectations of yourself is a good thing however, unrealistic expectations is not. Many traders when presented with the wonderful opportunities that the market offers can be very easily led to setting unrealistic goals for their trading. This can be devastating.

At various trader’s exhibitions and similar events, it is surprising to hear the number of people who demand trading systems that can produce several hundred percent return and won’t settle for anything less. These people sometimes then have the audacity to scoff at solid methodologies on offer that can reasonably expect to achieve a consistent 25 – 35% per year return.

Unfortunately for these people, their expectations are often too high and unrealistic. There will be times when they will suffer several losing trades in a row and when this occurs, they potentially will not be able to get back on track. With a slight drawdown in their trading capital and with their unrealistic goals in their mind, they will start to bend the rules and assume unacceptable levels of risk in order to regain the losses quickly and achieve their lofty goals.

Another problem that some traders face is even when they set themselves a realistic goal of 20% per year for example, they then expect to achieve that return in the first few weeks as opposed to taking a longer term view over the 12 months. 20% per year is only just over 1.5% per month yet some traders will expect to achieve that quickly and may adopt some of the poor habits similar to described earlier.

It is vital to set yourself goals with your trading but it is equally vital to ensure that those goals are measurable, and realistic.


The Holy Grail

The Holy Grail is often referred to in trading circles as the perfect trading system; the perfect conditions or indicator that will guarantee success in every trade you enter. All traders at some stage undertake the search for the Holy Grail whether it is consciously or subconsciously.

The reality of trading is that there is no such trading system in existence. It never has existed and never will. The fact that some software packages label an indicator the ‘Holy Grail’ only serves to whet the appetite of some people further and arouse their suspicion of what it could be and how they will find it.

It is also widely accepted that your own psychology or mindset is the largest single determinant of your trading success followed by your ability to manage risk. The small remainder of the ingredients to your trading success is your system which includes your entry signal.

When most traders start trading, they spend most of their time on developing their entry conditions. They will learn about various technical indicators, trends and chart patterns, and how they can be interpreted and applied to their trading.

In his book ‘Market Wizards’, Jack Schwager interviews numerous profitable traders in the United States. There is an interesting observation to be made about most of them. Often Schwager asked if they were to start trading again, what would they do differently.

Many answered that they would not have wasted as much time initially on their entry signals and they would have rather spent that time concentrating and developing their risk management rules and working on their own mindset or psychology.

When trading does not go well for most traders though, they begin to wonder what part of their entry conditions is failing them. Thoughts like is it the data they are using, the software, should they use different moving averages like weighted or exponential, or look at hourly data.

It is obvious that entry conditions are a necessary part of any trading plan but their importance is often overrated. Numerous texts have been written about various entry signals yet not enough focus on what is really important to trading.

This may not help the beginner who naturally assumes that their entry signal is the most important part of their trading plan and therefore they shall spend most of their time developing that.

Unfortunately some traders who have looked for the Holy Grail try to lay the blame for their lack of success on external factors. It might be the software they are using or the new entry signal they acquired from reading a book, but at the end of the day they should look no further than themselves.

Successful traders have numerous personal traits in common. They are focussed, disciplined, passionate, and are totally committed to their trading. They are humble and always prepared to learn from their mistakes. The Holy Grail of trading has never existed and never will.




Winning Factors

There are a number of specific factors that assist winning traders and that losing traders don’t consider.

A common factor is the search for the Holy Grail or at the very least, the development of such a complex trading system, that even the trader who thought up the approach, will likely lose their place a few times should they describe it to you.

Traders often undertake a search for the perfect entry system, even if it is subconsciously. If the trader doesn’t search for the perfect system, they may develop a very complicated approach, with the belief that ‘more complicated must be better’.

Some of the most effective trading systems have very simple trading rules and entry criteria, and winning traders often use very simple techniques. Invariably they use either a modified version of an existing methodology or else they have developed their own.

It could be argued that the simplest of trading methodologies are easier to implement than complex techniques. Having said that, there is another myth that says that trading requires some level of intelligence in order to be successful.

One of the greatest qualities of any open and free market is that it will not discriminate. It does not care what colour your skin is, whether you are male or female, how old you are nor how intelligent you are.

It is for this last reason, that a trader who possesses nothing else but patience, discipline and a simple approach, is likely to outperform a lot of people who are more intelligent but using a complex trading system.

Another factor with losing traders is when they have a bad trade. Sometimes, they will want to start from the beginning with a new trading system with the belief that their present system is useless.

When winning traders have a bad trade they will devote some time to analysing the trade and determine whether or not there is a lesson to be learnt from the outcome. It is unlikely however, that they will make drastic changes to their present system.

The only time they would consider significant changes to their approach would be when it was blatantly obvious that their present approach was no longer suitable.

Again, winning traders will often use simple approaches and they will use them consistently. It could be argued that a poor plan, with solid risk management rules, used consistently is going to outperform an approach where you are constantly jumping from one system to another.

When a lot of traders start out, they seek the best software available to fulfill their needs. Many charting software packages include various technical indicators that are available, and new traders seek to discover how these various indicators can be interpreted.

Numerous texts include the more popular indicators and many assume that as they are so widely documented, that they must be the best indicators to use.

Many losing traders rely too heavily on these indicators and the very mechanical systems that use them. Many would not be able to provide a brief overview of how the indicator is constructed let alone a more detailed explanation with why it should be used. Furthermore, often they will not consider using any other variables other than those declared as the defaults or the variables that the creator of the indicator stipulated.

There is no doubt that winnings traders will take advantage of computers because of their speed in analyzing large amounts of data.

What you will also find is that often, they would have also taken the time to learn the actual mathematical construction of the various technical indicators to fully understand what it is displaying. It is likely, that they could probably construct them manually if the need arose.

The importance of this is that they fully understand what the indicator is designed to achieve and therefore the best way of interpreting it and applying it practically.

Losing traders will attend seminars and courses like many others however they will often focus on the wrong things. They will try to copy the presenter's technique, by asking which indicators they use and even what time frame they use in their moving average.

This is misguided because even though the presenter may use indicator A and B does not mean that the individual asking the question should also use those two indicators.

Winning traders will always monitor new methodologies and indicators that are developed but will maintain their confidence in their own approach. They will no doubt consider them but will only incorporate some part of it should they see something that could make a valuable contribution to their present trading methodology.

This is important, because your confidence in your own trading approach is vital. Winning traders realise there is no perfect trading system and there own may be close to as good as it gets.

One of the common problems new traders face is developing an approach that is not right for them. Often new traders will tend to develop a short term trading system as they are attracted to this form of trading. Short term trading is an approach that considers trends of approximately 3 to 10 days in duration, and where the majority of positions are held for no longer than 2 weeks.

Short term trading by its very nature demands constant attention and a reasonable amount of your time during the trading week in order to monitor open positions, adjust stops, conduct analysis and make your trading decisions.

Generally speaking the potential for returns in short term trading is greater than those with medium or long term trading approaches especially when derivatives are included in the trading, hence the attraction to this style of trading. As people are generally infatuated with money, they are naturally drawn to short term trading because of the very real possibility of achieving good returns quickly.

For many people, a short term trading system may not be right for them and if it is not right for them, the chances are they will not achieve trading success over the long term.

Furthermore, often new traders who begin trading short term do not have sufficient capital to make it worth their while. They cannot tolerate losing months and the capital drawdown, and the high number of transactions results in a lot of commissions being paid, which can affect the bottom line considerably.

In short term trading, derivatives may be used to counter the lack of equity, however the degree of skill and discipline to trade these successfully is far greater, further reducing the chances of long term success, for beginner traders.

Generally speaking, losing traders place a great deal of importance on being right in a trade. There is a sense of control they think they have and there is also a degree of excitement and adrenalin associated with keeping in touch with the markets and the latest prices.

You will find some winning traders who will go for days without checking any prices confident in the knowledge that their stops are well placed away from the market action. They also don’t care about being right, only entering high probability trades and not caring when they suffer losses.

They treat trading like running a business knowing that they make some good decisions and they make some bad decisions.

There are a number of factors that separate consistently profitable traders with losing traders. Make the change yourself and commit yourself to trading profitably.




Exercise

Unfortunately, many people who start trading find success difficult to achieve, certainly in the period of time immediately after starting. Trading is a challenging endeavour that has torn people from all across the world across generations, from every extreme of their emotions. It is our money that is directly involved in trading and therefore at risk, and the potential of making more money is our primary motivation for beginning this undertaking.

Therefore any emotions that we may associate with other endeavours are heightened because money is something that seems to accentuate any natural human emotions that we have. Ironically, it is the money that encourages the vast majority to attempt to trade yet it is the money that causes most people to fail.

In his book, ‘Trade Your Way to Financial Freedom’, the renowned American psychologist Dr. Van Tharp discusses in several parts how important your psychology or mindset is to your trading success. He graphically depicts the significance of your psychology using a pie chart and explaining that there are three ‘Ingredients to Trading’. They are System, Money Management and Psychology. In the pie chart, the System is 10%, Money Management is 30% and the remaining 60% is psychology.

Why does a psychologist who has spent his entire professional life counselling traders of all experience levels say that so much of your trading hinges on your psychology?

The key is that your mind drives everything you do in your life and trading is no exception. Your emotions are a part of who you are and your decision making process. Decision making is a large part of trading, as you need to make decisions often and many of them are difficult decisions. Furthermore, people like to break rules, even ones they set themselves.

There are some simple trading rules that have stood the test of time, and will always work yet most people cannot follow them. It is essential that you realise how important it is that you demand of yourself the highest level of discipline to ensure you implement the requirements of your trading plan ruthlessly and follow some of the time tested trading rules.

At a presentation I gave a few months ago to a group of about 50 fellow traders, I was asked several questions, as per usual. After discussing the items above about emotions, sticking to a plan and the stresses associated with trading, I was asked about how you overcome the stresses and emotion of trading that seem to jeopardise so many traders around the world. I answered, “Exercise”. I immediately received many puzzled looks and someone said, “you mean practicing trading?”

It appeared to me that many had never considered a regimen of physical exercise in order to prepare well for trading. You don’t have to run in order to trade – you just have to sit at a desk.

However when you consider the demons that haunt many traders and the obstacles we face, then think about the benefits of physical exercise, shouldn’t we mention the two together more often. More and more today, people not only mention the physical benefits of physical exercise, they also include now the mental benefits of physical exercise. These are numerous.

Physical exercise can greatly improve both your mental and physical health. The physical benefits of aerobic exercise are well known and include improved muscle strength, flexibility, and cardiovascular endurance. Exercise also helps lower your blood pressure.

My belief in the benefits of physical exercise with regards to trading is based on the ability of exercise to help combat stress, and help you think more clearly when you are facing adversity.

Generally speaking, the lives of many have never been busier and more stressful. It has become a driving force behind most visits to doctors for people of all ages. Medically, when a person is experiencing stress, adrenaline pours into the blood stream as part of a person’s ‘fight or flight’ response and muscles throughout the body tense in anticipation of a challenge. Immediate effects can range from a short temper and heightened emotions to difficulty sleeping.

Many traders would agree that you can experience certain levels of stress when trading and it is often at these times that we do not employ the best judgement in our decision making.

John McCarthy, executive director of the International Health Racquet & Sportsclub Association (IHRSA), says, “Regular physical activity can help counter the potentially damaging effects of stress on the body and may help prevent stress-related illnesses. These activities provide a natural way to release tension in the body and will often lead to an automatic state of relaxation that naturally follows a good workout.”

Medically, during exercise the body starts to produce endorphins. Endorphins are chemicals that lead a person to feel peaceful and happy; they promote a sense of well being. This is a perfectly natural and effective tool in helping to manage stress. Exercise can also help some people sleep better and raises their self-esteem.

By increasing your self-esteem, your self confidence grows and this can directly assist you with trading, as confidence is one of the more understated character attributes required by successful traders.

Of perhaps less importance, exercising can help you physically look better, as those who exercise regularly, look more toned than those who don't. Exercise is one of the most important parts of keeping your body at a healthy weight, and people generally feel much better and confident when they see themselves in a positive light.

Again, those who feel more confident in themselves are likely to have more confidence in a trading plan they develop. The flow on effect can be very positive for their trading.

Trading is generally decision making where we need to employ sound judgement on a regular basis. Along these lines, exercising can also help your brain to work better. There have been numerous academic papers and research done to support the notion that exercise can improve a person’s ability to think more clearly.

Exercise has been found to increase a person’s mood state and an overall improved sense of well-being, which in turn helps to keep stress, anxiety and depression to a minimum.

Military forces all around the world engage in regular and demanding physical exercise in preparing for the demands of military operations. Officer training institutions generally enforce greater standards as officers are often required to make decisions and often do so under pressure and hardship. The physical exercise they endure enables them to think more clearly than the average person and remain level headed when the pressure is on and all seems lost.

Could we as traders not benefit from a similar mindset where we are able to think clearly at all times and make sound decisions based on solid judgement? Wouldn’t this help us take a step towards overcoming the adversities we can face with our emotions and stresses?

Focussing on the type of exercise, it is important that people don’t exert themselves too much. It has been found that a steady aerobic workout will produce far greater results than those that exhaust the body and leave a person folded over in pain and out of breath.

A steady aerobic workout will greatly assist the brain’s ability to solve problems and make decisions fast and effectively. Generally after exercise, people are able to concentrate and focus much better than before. They are better able to block information that is irrelevant to the task at hand, and respond much faster to information relevant to the task.

From a motivation perspective, it is important for those who have never really exercised before or where there has been a lengthy layoff, that they start off easy. Many unfit people set out to begin an exercise routine with great ambition and enthusiasm and then find that they cannot stick to the routine and their motivation quickly disappears.

These people end up on a never-ending cycle of great ambition, loss of motivation, and a steady slump back to where they started. This is often because they are not enjoying the exercising they are doing. This is a problem.

Exercise is supposed to be a fun activity, even for the whole family and when you arrive back home feeling terrible, the motivation to go back out and do it again takes a big hit. This is when you will begin to think of all the reasons not to go again and then, you have taken a turn down the wrong road. Naturally, the fitter a person is, the more they will reap the rewards from aerobic exercise.

Physical fitness does not come easy. The best strategy is to gradually increase the duration of your exercise sessions and, along with enhancing your physical fitness, your mental muscle will also begin to take shape.

There is no doubt that regular and moderate aerobic exercise will help your brain to function more efficiently, and therefore reduce stress, think more clearly and remain level headed in times of emotion and adversity. In an endeavour where very few people succeed, it is in our very best interests to do everything we can to increase our chances.

I strongly believe that physical exercise can greatly assist traders to think more clearly, reduce the effects of stress, and ultimately make better and timelier trading decisions.



Take a Break!

To many who have traded for an extended period of time, they would agree with the fact that traders can experience a wide range of emotions and often one straight after another.

Traders can experience the exultation of a winning trade that went very well to the despair of the string of losses where ‘giving up trading’ is a prominent thought in one’s mind.

Books like ‘Market Wizards’ by Jack Schwager and other similar texts illustrate how successful traders have found a trading methodology that they are very comfortable with. None of them have found any magic solution to trading but they all clearly possess an inner confidence in their own ability to follow rules and their own trading plan.

Undoubtedly however, trading can be a taxing experience on your mental health. You are constantly faced with decisions that need to be made and can easily go through the swing of emotions described earlier.

For some people, in all honesty you may also lack confidence in your own ability to trade well or lack courage of your own conviction and therefore experience another array of emotions when trading.

Sometimes trading can be quite stressful and other times it may appear as if you can do no wrong. These emotional swings and emotional stresses do impact on your mental state and can ultimately affect your trading decisions.

It may be prudent sometimes to schedule a break from trading. Therefore, close all positions before your break, or a few weeks out from the break commencing, open no new positions and allow your open positions to take their course in the time leading up to your break. The time you schedule your break may coincide with the school holidays or your Christmas break from work.

This may end up being the best trading decision you make as you are able to separate yourself from some of the emotions you have experienced, and recharge the mental batteries. The requirement for a break will obviously significantly vary from trader to trader and will depend largely on your trading frequency.

One of the things stopping people thinking about taking a break is that they may miss out on some good trading opportunities. Rest assured that the market you trade will always be open for trading. This means that when you finish your two week break for example, the market will still be there and be ready for you, as if you didn’t even have your break.

Next time you open your diary, consider scheduling a break from trading.



Congratulations for the Profit

Often when people talk about the importance of psychology, the need to be as unemotional in your decision making as you can be is frequently mentioned. Decisions are required often when trading and a fair percentage of the decisions that are required will be difficult.

Humans are naturally inclined to break the time tested trading rules and this is why your psychology and decision making is such a vital part of your success. Successful traders have great internal control and discipline to overcome the natural tendencies.

When you have a great trade, why not reward yourself for it? When it is often considered that trading well for an extended period of time can be difficult for many, yet you have a trade that all goes well, you may think it appropriate to congratulate yourself for it.

For example, you may have followed all of your selection criteria, and you considered all the things your trading plan insists you follow when deciding to enter a position. Once the trade was open, you monitored your initial stop loss point and then started to trail the price with your trailing exit.

Some time later when the position reversed sufficiently on you and your trailing exit was hit, you executed the sell order without emotion and realised your profit in the trade. All in all, it was as close to a perfect trade as you can have, and it was your largest profit you have had in 12 months.

A situation like this will occur for almost everybody at some stage and more often for some. When this does occur, you should consider rewarding yourself.

Depending on the size of your profit, you could take the family out to dinner, escape to a country retreat somewhere with your spouse for the weekend, or perhaps buy that new #1 wood for your golf set you have been eyeing off for months.

In some way, reinforce to yourself that you have had a great trade and have followed your trading plan to the letter in doing so. It helps reinforce the positive and instill in you that good things can happen when you follow your plan.

Thanks
_____________________
Mr. Yuvraj Kalshetti.
my trading corp.
Shop no. 3, Kalshetti Complex,
Saraf line , Omerga, 413606
02475 - 251888