Do you have the mindset of a Professional Trader?
As our trading journey progresses, we often find the biggest issue we have to deal with is ourselves.
This is not a profound statement – anyone who studies trading is forever being reminded that trading is ’20% about the system and 80% about the mind‘. And yet how many aspiring traders really understand this statement?
I’d suggest that not only do very few aspiring traders fully understand this, but that a good portion of traders who believe they’ve developed the mindset, only believe this because they are going through a purple patch in their trading and making money.What happens to these traders when their purple patch ends and they experience a run of losers? Is their mindset sufficiently ‘mature and developed as a trader’ that they accept this inevitable string of losers and simply buckle down and keep trading their plan?
Is your mindset right?
Developing the right mental approach to the market takes an incredible amount of experience and understanding – there is no real substitute for this. You need to experience the euphoria of a great trade, and the downright misery of a bad one.
You need to learn to put these emotions aside and move on. And that is incredibly hard.
How many of us have seen a stock rocket 10,20 or even 30% in our direction right after we closed our position for (what we thought) was a very nice 5%? How did that make us feel?
And what about the times when our stops are taken out only for the stock to rocket once again in our direction? How does this make us feel? For some of use, we blame the professionals, they obviously went fishing for our stops! But who put the trade on? Us or the professionals? If you accept responsibility for your trading then you are well on the way to developing the right mindset.
Most traders will have heard of Mark Douglas – the man is rightly credited with writing one of the best books on Trading Psychology available – Trading in the Zone.
I constantly remind myself what Mark’s key messages are;
- Anything can happen.
- You don’t need to know what is going to happen next in order to make money.
- There is a random distribution between wins and losses for any given set of variables that define an edge.
- An edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is unique.
- Thinking about what these messages really mean gives me an inner calm when trading, and that is absolutely vital towards success.
How writing a plan and keeping a journal help with getting your mindset right
A big part of developing a traders mindset is in having a trading plan. And not just something you have thrown together because ‘every trader needs a plan’, but something you have developed over time that deals with all the aspects required to make you successful. A good trading plan covers off not just strategies you will use, but also financial requirements, rewards systems, hardware and software requirements and your trading disciplines (to name but a few).
Once you start trading, it is absolutely critical that you record your trades in your trading journal. Having a record that you can analyse and use to improve your future performance is critical. If you don't yet have a trading journal, then click here to download a FREE copy of my journal software that you can use in your own trading
Trading is a really tough way to make a living, but would you really expect a profession that offers unlimited upside to be easy to master?
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8 comments
1. A back-tested strategy that has a positive expectancy.
no. The good traders I knew would find the idea pretty funny.
2. An understanding and acceptance of the risk of each trade
obviously - but much more important, the ability to carry a complex position in their head and appreciate how an individual trade modifies that position
3. The discipline to trade according to the strategies rules
you seem to be assuming that good traders have a secret winning strategy ...
4. An understanding and acceptance of probability
yes
5. A well funded account
yes
6. Realistic expectations
isn't this the same as (4)?
As ee says, information is the key.
How to tell who might be a good trader from a set of spotty youths applying? Take anyone who frequently ran a book on sporting events at school / uni. Put them in a room and watch them play poker.
db
On point 3 - No, I wasn't assuming they have a secret winning strategy, I was essentially saying that once you have a strategy that has an edge, you have to have the discipline to trade it.
On 6 - I've spoken to many aspiring traders / investors who believe that 100%+ returns are the norm, as opposed to the exception. What I meant here was if a new trader had a more realistic expectation from the outset, they would be more likely to stick with it.
I like your 'how to spot a trader' example
Hi emptytrend,
Of the small handful of successful traders you refer to who were outside 'the flow' what do you think made them successful?
For what it's worth how about
1. A back-tested strategy that has a positive expectancy.
2. An understanding and acceptance of the risk of each trade
3. The discipline to trade according to the strategies rules
4. An understanding and acceptance of probability
5. A well funded account
6. Realistic expectations
Of course, given my lowly status as an attic dweller, I could be completely off the mark here..
Discipline, discipline, discipline....and adaptability to circumstances (lack of any "system"!!) and a willingness to admit when they are wrong and the market is right.
Funding is of course never an issue for professional traders (but certainly is for amateurs). All your other suggested points are meaningless drivel.
HTH
ee
Yes - that is roughly the right message. I have spoken to several hundred people who would call themselves professional traders (because they worked for banks and were paid to trade). I'd say that only a handful were really good - and most of the rest did OK mainly thanks to the systems and information flows that their employment afforded to them.....
...but those outside that privileged flow of information (and with somewhat inferior technology) ...trading P/A etc...are ALWAYS starting at a disadvantage. If they are really great traders (the handful I mention above) then they may be able to overcome the disadvantage of not seeing the flows - but most of them won't....including people in attics.
ee
My belief is that the mindset required to be a successful trader is something that very few have, but that everyone is capable of developing.
In any endeavour, we can only control things within our circle of influence (hence why most new traders focus on finding indicators and working on entries), when in fact they really need to be focusing on developing their mindset.
Most traders / investors, do not believe that their mindset is within their circle of influence - Can we really control Fear or Greed? Most people think not.
Take the story of the little boy who was bitten by a dog when he was 2 years old. He now has a fear of dogs. However irrational that is (given 99% of dogs don't bite), he carries that fear into his adult life. He tells everyone he is simply scared of dogs. He doesn't work on overcoming this fear, he just avoids dogs. This is how the majority of people will deal with an irrational emotion.
Take now, the same boy, who, as an adult, decides to work on this irrational fear and overcome it. He starts by developing a plan - he has a neighbour, who has a friendly dog. He spends time with the dog until he begins to feel comfortable with it. He then starts to stroke the dog, and slowly this irrational fear of dogs is replaced with a rational understanding that most dogs are friendly, but that the odd dog is not.
By firstly identifying the fear and then working on things within his circle of influence, he is able to overcome his fear.
So what has all this got to do with trading. Well, the 99.9% of traders that shouldn't be traders are probably still scared of dogs, whereas the successful traders have brought into the circle of influence a mindset that enables them to succeed.
99.9% of people who think they are traders aren't capable of doing it either
So the message is:
(1) Know yourself
(2) If you think you are suited to be a trader, then you've probably got number (1) wrong. :^}
I have only spoken to two 'professional' traders in my life. Both have been doing it for over 10 years so I guess they know something, as they have the assets to suggest so. They both agree that too much focus is placed on entries and exits at the expense of fully evaluating their system and working out it's expectancy, which is far more important. They pretty much say that this is why people can be successful for a year or more, but then lose everything.
Most people think having a high proportion of winners to losers is a successful system, but it's not so. The expectancy of a system over a long period is the key figure to assess; i.e. how many pounds profit per pound staked does the system produce. I know many people who go for frequent low margin trades, and they feel they are good traders as they win many times, then a big loss comes with one trade and they can lose much if not all of what they made.
In summary, you need to have a sustainable system, and you need above all else to know yourself, and be able, whatever the circumstances, to trade with equanimity. Now there's a good name for a horse jockey's union if ever I saw one.. :^}
Buffy
No. I am an investor.
I've worked with some world-class traders....and I know I'm not a trader.
99.9% of people who think they are traders aren't capable of doing it either and shouldn't be encouraged to delude themselves otherwise.
ee