When you first get into trading, there is only one situation that you think you are prepared for…making a shit-ton of money.
Dolla Dolla bills y'all.
But are you really ready?
I believe that most aspiring traders are not ready to make the money that they are dreaming of. Mostly because they aren't mentally prepared for it.
Another reason is that there are other situations that we are not equipped to handle yet, that get in the way of making aforementioned shit-tons of money. So in this post, I'll get into the five situations that you have to be mentally prepared for, in order to have the best shot at success in trading.
Keep in mind that many times you will have to experience a situation to really internalize what I'm talking about. But if you are more aware of what is going on, then you have a better shot at fixing it quickly.
1. One Losing Trade
Alright, let's start small. You may think that one losing trade is no big deal.
…and to some people, it might not be.
But most of the time, one losing trade is much more detrimental to your trading psychology than you think.
How many times have you done this…
Your stop loss gets hit and you get a little sick feeling in the pit of your stomach. You check your P/L statement, to see how much you lost.
Even if your loss was within your normal risk parameters, you wonder how you could have messed up that badly.
…you tell yourself. You search for things you should have done to make that trade a winner. You replay that trade in your head for the rest of the day.
When you find yourself doing this, stop right there. Take a deep breath.
Then review this checklist:
- Did you follow the rules of your system? If you don't have a system that you have backtested and understand really well, then you need to get one before you take another live trade. If you did follow your system, then you have nothing to worry about. On to the next trade!
- Did you make a mistake? You could have fat-fingered the stop loss price or forgot to put in a take-profit. Even if you did, don't get down on yourself. Write down your mistake, forgive yourself and move on, don't dwell on it. Everyone makes mistakes once in awhile. If it is a common problem, sit down and figure out how to solve it.
- Even though this was a losing trade, what did you do well? Yes, you did something well, I guarantee it. Maybe you followed trading preparation plan, you were trading at the right time of day, you actually executed a trade (instead of just sitting on the sidelines), or you were just plain excited to trade that day. Write that down in your trading journal. On to the next trade!
There really isn't much more to it than that. We have a tendency to psycho-analyze every losing trade, when it really just comes down to doing those three things. Don't make it more complicated than it is.
…ask me how I know all of this. Yes, I've been there too.
2. One Winning Trade
If a losing trade is usually a bad thing, from a mindset perspective, then a winning trade must be a good thing… right?
Not if you do this…
How many times have you closed out a winning trade, then starting shopping for a Lamborghini online? OK…well, at least looking at pictures?
If Lambos aren't quite your thing, then looking at pictures of any other type of material goal that you want to achieve. There obviously isn't anything wrong with having material goals, in fact, that is part of the reason we trade.
But getting too high on one winning trade can only have one result: An equally big letdown when you have a losing trade.
Remember, there are no free lunches. Everything you do has a trade-off. When it comes to trading psychology, the closer you can stay to the middle, the less likely your chances of going off the deep end at the extremes.
Concentrate on trading well and if you work hard enough, the Lamborghini money will probably take care of itself. Get ahead of yourself and you only build roadblocks to your success.
3. A Losing Streak
Alright, now we get into a situation that most people usually don't mentally prepare for. You probably know that it could happen or it might happen to other traders, but it will never happen to you…right?!
But a losing streak can happen to anyone. In fact, it does happen to everyone. Sometimes shit just ain't working.
That's why they call it Trading and not Winning all the Damn Time.
So before you hit a losing streak, be prepared and figure out what you are going to do when that happens. Will you take a break, trade smaller lots or downshift to demo trading?
The one that is right for you will depend on your personality and what is going on in your life at the time. But be ready for a losing streak because it will happen.
Your mindset will determine if you recover from it or continue going downhill.
4. A Winning Streak
Just like with individual winning trades, a winning streak can tough to deal with too. If you were shopping for Lamborghinis before, you will probably want to add a Ferrari to your collection after a winning streak.
The Cup that is Half…Overflowing
But just like with individual winning trades, be prepared for what can happen after a winning streak. First, don't get too excited, optimistic or big headed.
This can lead you to take more risk than usual and give back all of your gains. Happens in Las Vegas all the time.
Walk away with $10K or double down? Double down, of course!
No, no, no, we are not gambling, we are taking educated guesses. Be grateful for your winning streak and continue to do what you have been doing.
Fear of Success
An even more interesting thing that you might discover on a winning streak is that you are afraid…of winning. Yes, the fear of success is a real thing.
Your parent's comments like: “money doesn't grow on trees,” come flashing back. What if you do buy that Lambo, people will probably think that you are a drug dealer…
…and on and on.
Then you find ways to sabotage yourself and lose some trades, so you come back down to “reality.” Imagine yourself on a winning streak, then figure out how you will deal with it.
5. Random Criticism
There is one thing that can mess with your head, faster than anything else…letting the opinions of others affect your judgement. Everyone wants to give you their opinion about what to trade and why a trade won't work.
…and they may be right.
But you might be right too.
It all depends on your strategy and the timeframe you are trading. So don't put too much stock in what others are saying…unless they are your mentor.
Even then, you should learn what they do well and think for yourself. They mess up too.
(If you need some help finding a mentor, you should read this post)
There are two ways that I know of to keep from letting the opinions of others get to you…
Develop Immunity as Part of Your Trading Preparation
Some people are naturally more immune to criticism. I lean more towards this end of the spectrum. That's why I share the results of every single trade I take on Twitter.
— Hugh Kimura (@TradingHeroes) March 30, 2016
No matter what you post, I guarantee that you will get some trolls commenting on your posts. Don't do this for too long, because that shit can really put a downer on your day.
But if you can ignore the comments and keep moving forward, you are probably getting better at reacting (or even better, not reacting) to criticism. I think you will find that if you just ignore stuff, their power suddenly disappears.
Shield Yourself as Part of Your Trading Preparation
Of course, I realize that not everyone is cut out to ignore everything. Some people are more sensitive. That's not a good or bad thing, it just is.
So if you are more sensitive to comments and don't want to become more immune, then stop about it. Don't visit forums and don't talk about it with people who know nothing about trading.
I know that you are excited about trading, but you don't have to talk about it with everyone.
Some self development advice out there says to publicly declare your goals because that will make you more accountable.
Sure, that will help some people.
But it will also crush other people.
Most people in your life mean well, but if they don't truly understand how trading works, they will probably give you the wrong information. So if you are a more private person, keep it private.
There is nothing wrong with that 🙂
So those are the five trading situations that you have to be prepared for. You may have a few covered, but it only takes one to hamper your development.
I encourage you to take a little time right now to evaluate how you react in these situations. You might be surprised at what you discover. If you are reacting negatively to one (or more) of these situations, figure out an exercise that you can use as part of your trading preparation, to help you to stop doing what you do.
Did I miss something? Let me know in the comments below…