Trading the financial markets can be a tough journey, especially if you constantly feel that your mental energy is depleted and that you have a difficult time to focus on the markets. Fortunately, there is an effective way to return the excitement that trading carries along – by improving your trading mindset. In this article, we’ll take a look at what a trading mindset is all about and why it has such a large influence on your trading performance.
Are you short on time?
Here is a list of the most important points to develop a positive trading mindset:
- Develop an effective morning routine. Wake up earlier than usual. Working out or mediating early in the morning can help you to approach the market relaxed and calm.
- Never stop learning. A financial market education forms the foundation of any successful trader.
- Always have your losses under control. Develop effective risk management rules.
- Keep a trading journal. Spot common mistakes and fine-tune your trading strategy.
- Observe others. Replicate successful strategies and learn from the mistakes of other traders.
- Control your emotions. Don’t get overly emotionally attached to a trade and practice your trading discipline.
- Remember that the market is neither moral nor immoral – it’s amoral. Losses are nothing personal, and even professional traders take a hit from the market from time to time.
What is a Trading Mindset?
Markets are neither moral nor immoral – they’re amoral. The markets have no emotions at all, so it’s completely up to the traders how they perceive the market to be. If your goal in the long run is to attain and maintain the status of a trader, it’s very important to develop a mindset that helps you observe the market from an unemotional perspective. Your mindset will ultimately define your reactions during losing trades or large profits – will you be able to stay calm during these events and avoid reacting based on emotions?
This is what a well-rounded trading mindset is all about. A disciplined trader will never let emotions to interfere with his or her trading decisions. However, bear in mind that it takes much effort to achieve the status of a disciplined trader. You don’t become a professional overnight in any business, and trading is no different. As one famous trader said,
“… don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” – Paul Tudor Jones
Why is a Positive Mindset Important?
As we already said, the market has no emotions at all. All emotions come from market participants, who are still predominantly humans. This is why chart patterns and trend-following techniques work so great in trading – they rely on well-known patterns of human behaviour and take advantage of market psychology.
However, you may have heard that 90% of traders lose 90% of their trading funds within 90 days. It’s important to ask yourself what are the main psychological traits that distinguish the remaining 10% of successful traders from the majority of other market participants. All of them humans, but a small group of traders still succeeds to significantly outperform all other traders combined. While it’s very unlikely that they have found the holy grail of trading, the truth is that one psychological trait comes very close to it – a trader’s mindset.
Top Tips to Improve Your Trader Mentality
If you feel that your trading mindset needs a push, follow these top tips outlined below to learn how to survive the trading game.
- #1 Get in the Right Trader’s Mindset
Traders can benefit a lot from approaching the market from a calm and relaxed mentality. If you have proper risk management guidelines in place, there is no need to worry about trades at all. In the end, what can go wrong? Even if a trade hits your stop-loss level, it’s not the end of the world. Losing trades happen all the time, and even professional traders have a winning rate closer to 50% than you might think. With a high enough reward-to-risk ratio, which is the ratio of your potential profit and potential loss on a single trade, you’ll still end up in profit even with a 50% winning rate.
A losing trade doesn’t mean anything personal. Markets go up and down all the time, and you need to have faith in your market analysis. Remember, markets don’t have emotions, and traders who avoid succumbing to their own emotions tend to significantly outperform traders who let their emotions interfere with their trading decisions.
Having a morning routine may also help a lot to approach trading relaxed. Try waking up earlier than usual, work out or meditate and sit in front of your trading desk with faith in your analysis and risk management principles.
- #2 Keep Learning
Education is probably one of the most important factors that separate successful traders from unsuccessful ones. Even if you already have the right mindset, you need to have a solid foundation of the markets to understand the reasons behind certain price-moves or market reactions. While there are many concepts in trading worth learning, your best bet would be to keep learning until you find the tools that best suit your needs and trading style.
Try to spend at least one hour before bedtime to read a trading book in order to get an insight into the practices of other successful traders. In addition, online trading courses are also a great way to increase your knowledge about the markets.
- #3 Don’t Let Losses Get Out of Control
A common mistake among beginners in the market is the way how they manage their losing trades. Usually, novice traders wait for a losing trade to become profitable again, as they don’t want to close the trade in loss. As you can see, emotions are again interfering with rational trading decisions which can be very costly in the long run.
The following table shows how much return a trader has to make to return to his initial balance, after losing a certain percentage of his trading account:
Amount of Balance Lost
Amount Necessary to Return to Initial Balance
If you lose 50% of your trading account, you’ll have to make a 100% return to be break-even! This can be a very tough undertaking.
Instead, try to manage losing positions like a professional trader, who are very impatient with losers. If one of their trades is slightly in minus, signalling that their trade setup isn’t playing out as expected, successful traders will close that trade and move on. They cut their losers short, and let their winners run. In the long run, this can make a real difference to your bottom line.
- #4 Keep a Trading Journal and Make Regular Retrospectives
Another great way to attain a successful trader’s mindset is by keeping a trading journal. Trading journals are just like regular diaries – only that they include the trades you make. Journals consist of journal entries, which can cover anything that you think might be important about a particular trade.
Standard journal entries include the currency pair that you trade, the reasons why you got into a trade, its entry and exit levels, and additional market commentaries. Once you close your trade, develop the habit to update its journal entry by the trade’s profit or loss, and any additional comments which might give an insight into the performance of the trade.
Making regular journal retrospectives can reveal a wealth of information about your common trading patterns that lead to losing trades. Maybe the majority of your pullback trades turned into losers? Your trading journal will show that and help you to improve your trading skills.
- #5 Observe the Actions of Other Successful Traders
One of the best ways to learn a skill is by observing the actions of people who have already mastered the skill. Trading is no different from any other skill, and replicating the process and work routine of other successful traders can make miracles for your trading mindset.
Finding a role model among successful trader might be difficult at best, but fortunately, there are dozens of excellent books that you can pick to get an insight into the mindset of those traders. “Trading in the Zone” by Mark Douglas is a classic that every beginner in the markets should read early in his trading journey. Another exceptional book which could help you in attaining an effective trader’s mindset is Stephen R. Covey’s “The 7 Habits of Highly Effective People.”
- #6 Control Your Emotions
Emotions play a big role in trading. In an ideal world, there would be no emotions attached to the markets and all traders would analyse trade setups from a completely objective standpoint. Nevertheless, the majority of traders are still humans with emotions such as fear and greed, which more often than not interfere with a rational decision-making process.
Inevitably, there is fear involved with a losing position and greed when a position turns green. Our job as traders is to learn how to control those emotions so that we can maintain a clear picture of the market and make rational trading decisions. This is how Colm O’Shea, a trader at George Soros’ hedge fund, describes his boss’ complete absence of emotional attachment to a trade:
“I remember”, he says, “one time he had this huge Forex position. He made something like $250 million in one day. He was quoted in the financial press talking about the position. It sounded like a major strategic view he had. Then the market went the other way, and the position just disappeared. It was gone. He didn’t like the price action, so he got out. He doesn’t let his structural views on how he believes the market will play out get in the way of his trading.” – Colm O’Shea
- #7 Remind Yourself that the Market Doesn’t Owe You Anything
One common mistake that many traders continuously make is overtrading the market. Especially after a trade goes wrong, some traders feel the urge to chase the market for trade opportunities, only to accumulate hefty losses by the end of the day.
This is not how the market operates. The market doesn’t owe you anything, and it might be a wise decision to repeat this mantra every morning you wake up. Some days there are extremely lucrative trade setups, and the other days there might be nothing. This point strongly relates to the previous point of controlling your emotions and having trading discipline. Don’t feel angry at the market once a trade turns into a loser – remember, the market has no emotions about you at all.
- How to develop the right mindset when trading?
Developing and maintaining the right trading mindset is crucial for long-term success. While it can’t come overnight, certain techniques can help to accelerate your performance. Some of them are developing an effective morning routine, educating yourself about the markets, having losses constantly under control, keeping a trading journal and making regular retrospectives, observing and replicating the actions of other successful traders, controlling your emotions and not getting too much emotionally attached to a trade.
- How not to sabotage performance?
While there are many reasons why traders sabotage their performance, arguably the most destructive one is letting emotions to interfere with your trading decisions. Fear and greed are common emotions that many undisciplined traders have all the time while trading. Imagine a trade that is $1,000 in profit, but your analysis shows that the trade has a potential of reaching a profit of $3,000. Would you let fear of losing those $1,000 of unrealised profits interfere with your analysis, or would you let the trade run until it reaches its initial profit target of $3,000? Having faith in your trading strategy and analysis is very important in maintaining a trade’s reward-to-risk ratio.
- What are some trader brain exercises?
In my personal opinion, the best exercise you can get is both joining a community such as My Trading Skills and practicing trading on a demo account. Whether it’s a demo account or real account, the best way to gain experience and trading knowledge is by constantly following the market and questioning why a trade is performing good or bad.
Speaking about brain exercises for traders, did you know that you can even trade during weekends? Well, not with real money. Simply open a chart, scroll it to some past date, and make a few paper trades to fine-tune your trading strategy. The good part about this approach is that you can cover weeks of price-data in just a few hours.
Suggested Reading: Can You Trade Forex While Working Full Time?