Your mindset is the biggest determining factor in if you will succeed at trading or not. It trumps any trading system or indicator.
The mindset of a successful trader is developed through a process of repetition, review and continual improvement. A trader must be willing to keep taking trades, review them in a journal, then take an honest look at what improvements can be made. In addition, traders must continually work on eliminating negative habits and psychological programming.
There's a lot to unwrap here, so let's dig into the details. I'll go over each of the elements to show you how you can start building the mindset of a professional trader.
Practice, Practice, Practice
The first important concept to understand when learning to develop a trader's mindset is that you have to be willing to practice your craft. Just like boxers go to the gym and runners hit the track, traders have to practice their trading strategies to keep their skills sharp.
There are a couple of ways to do this.
First, you can use backtesting software to download historical data, replay the data and take simulated trades. This is similar to a NBA player practicing his jump shot.
You can practice your trading methods in simulation when you aren't trading, when the markets are closed, or when you don't have an internet connection.
If you can get just a couple more hours of trading practice per week, imagine how much that can compound your skills over time.
Next, you can also open a demo account and take demo trades alongside your live trades. There might be trades that you don't want to take in your live account, but you can still take them in your demo account, and learn from them like they were live trades.
Again, this gives you more repetitions and more opportunities to fine tune your pattern recognition skills. Another benefit of using a demo account is that it helps build your intuition.
Not all traders should rely on intuition to make trading decisions. But tracking your demo trades will help you understand if you can trust your intuition, or if you should just stick to your system rules.
Break Through Your Drawdowns
I have a more risk adverse personality, so I've never blown out an account. That might sound like a good thing, but my type of personality profile also comes with a few downsides.
The biggest downside is that I used to shy away from taking trades, especially in a losing streak.
After a lot of review, I realized that this is the opposite of what I should be doing.
Let me clarify that…
I'm not saying that traders should keep taking trades, if their strategy isn't working, or they are not focused.
…or worse yet, if they don't have a strategy at all.
However, if you're confident that you have an edge, then you should keep trading. By definition, the only way to end a losing streak and make up for the losses, is to keep trading and keep applying your edge.
This can seem like an insurmountable task and it might even seem hopeless…or even a little scary.
But it must be done.
You must embrace the suck.
If don't want to lose more money, you can stop trading your live account and open a free demo account.
Do what you have to do to keep trading.
Yes, it's uncomfortable because you could keep losing.
When you're in this situation, it's also helpful to ask the following questions:
- Am I attaching too much of my ego to my losing trades?
- Am I insisting on being right, at the cost of being profitable?
- Am I too worried about losing?
- Am I beating myself up after each loss?
If you answer yes to any of those questions, develop the awareness of when you're doing those things. Work on hitting the “mute button” on those thoughts and learn to review each trade as objectively as possible.
You will learn more about yourself and your trading strategy from pushing through a drawdown, than any other trading activity I know of.
Once you know that you can successfully overcome a drawdown however, that will give you a ton of confidence that you'll be able to do it again in the future.
Keep a Trading Journal
In order to understand what you're doing right and what you need to improve on, a trading journal is essential.
Regardless of which method you use, just be sure that it works well for you and that it's simple enough that you can fill it out quickly. When a trading journal is too complex, you are less likely to fill it out and won't get the benefits.
Most trading journals have the basic information about each trade.
But also consider including these elements:
- Flash Cards
- Missed trades
- Trades you were considering taking, but didn't
- Profit/loss calculated in multiple of risk
Adding these elements to your journal can help you progress significantly faster than if you don't track them. Review your results weekly and take an honest look at how well you're trading.
Most aspiring traders I've seen don't fill out a trading journal. This is like being an Olympic runner, but not recording your lap times.
You must track your results, in order to improve them.
Improve Your Trading
Once you've recorded your trades in your journal, now identify areas where you can improve.
Here are some staring points that you should explore:
- Should you give your stop losses more room?
- Are you cutting your winners short?
- Do you move your stop losses?
- Are you trading at the ideal times of day for your strategy?
- Should you be more selective about your trades?
- Are you afraid to take trades that would have worked?
- Do your entries differ from how you backtested your strategy?
- In hindsight, would you have still taken every trade you took?
Even a very simple trading journal will allow you to go back and review these questions. Again, try to review each trade as objectively as possible and look for common mistakes or potential optimizations.
Upgrade Your Mindset
Last, but certainly not least, figure out how to your continuously upgrade your mindset.
Scientists used to believe that our brains could not be changed after a certain age. More recent studies have proven that this is not true and we can form new brain connections and pathways throughout our lives, an ability called neuroplasticity.
So don't feel like you're stuck with what you currently have. It is possible to change how your mind works. You just have to be willing to put in the work to make those changes.
Here are some mindset challenges that traders often face:
- Hesitation when taking a trade
- Discouragement during a drawdown
- Blaming others for trading losses
- Self-pity after a losing trade
- Not forgiving yourself after a mistake
- Revenge trading
- Getting greedy on a trade: either targeting too big of a take profit or not using stop loss
All traders have struggled with at least one of these issues, at some point in their careers. On deeper levels, most professional traders still face these challenges. They have just learned to control them better than amateur traders.
You can read these books and see that for yourself.
So how do you fix these issues?
Here's a simple exercise that you can do to start upgrading your mindset. Human psychology is a very complex and nuanced topic, so I cannot give you all the answers in one short blog post.
But this can put you on the right track to understanding what will help you.
First, write down the behaviors that you feel are having a negative impact on your trading. Then focus on each one individually.
For example, let's say that the first item on your list is: Blaming others for your trading losses.
This might include:
- Blaming your broker for hunting your stops
- Blaming your family/partner for not allowing you the time to trade
- Blaming your job for not having enough time to trade
- Blaming an educator for not teaching you properly
Once you have your list, first ask yourself if the opposite could be true.
Is it remotely possible that your broker is NOT hunting your stops? Could it be that you really do have enough time to trade, but you're spending too much time watching Netflix?
Take an honest look at the opposite of your belief.
What do you find?
Next, do the “Why Exercise.”
Keep asking yourself why, until you cannot ask come up with any more answers, or you come to an important realization.
In this example, you might say something like this:
- Why do I blame others for my trading losses?”
- Because everyone is out to get me
- Why is everyone out to get me?
- Because the world is a harsh place
- Why is the world a harsh place?
- Because that's what my parents taught me
- Why did your parents teach you that the world is a harsh place?
- Because that was their experience growing up during the war
So in this example your tendency to blame others, could actually be coming from your parent's experiences. Not directly from your own experiences, or because people are intentionally sabotaging your trading.
Sometimes, just the realization of where your beliefs came from is enough to change some behaviors.
So that's where you should start.
However, there can be beliefs that are so deeply rooted, that they cannot be fixed through realization alone. If you want to dig deeper into possible causes of these roadblocks, and how to fix them, read this post on advanced trading psychology.
So if you're struggling with figuring out how to be consistently profitable, start implementing the actions suggested in this post.
Remember that learning trading strategies is easy.
Developing the mental toughness to overcome drawdowns and internal doubt is the challenging part. This is the reason that most traders quit.
But if you keep at it long enough, I believe that most people can figure it out.
If you want help with developing your trading mindset, join the TraderEvo program. I coach traders through the entire process of learning to trade and hold them accountable at every step along the way.