While so called “hard skills” are very important, these days as much attention is paid to a trader’s “mindset” as to their technique. And this is for good reason. Not only can your mindset impact directly on trading profits but it can also affect your ability to recover from losses.
A positive versus a negative attitude can make a wide difference in terms of overall profitability. It’s well known that successful traders tend to have a positive outlook. On the flip side, unsuccessful ones tend to have a pessimistic outlook.
Some might say that attitude comes from real life experiences. But the path to making a living through financial trading is tough and competitive. If you are not in the right mindset, the odds of succeeding are much lower.
Fortunately there is something we can do about this. Knowing why and when the seeds of doubt and pessimism can creep in is the first step to fostering the positive mental attitude that we should all aim for.
1. The urge to see a quick profit
From email pitches to website forums, the internet is full of stories of people telling us they’ve made huge bucks in trading with little to no effort or risk. It’s not surprising then that many newcomers start off with expectations that are unrealistically high.
There’s no such thing as a free lunch and certainly not in financial markets. That means quick profits come at a big price – the necessity to take much higher risk.
The urge to make a quick buck often sets the stage for problems to come including disappointment and negativity. If the problem isn’t caught soon enough it can ultimately see a trader lose all of their investment.
Most professional traders aim for steady and consistent profits every time rather than big one-off wins. A steady 10% profit in a year is far better than a 200% return followed by a 100% loss.
2. Rising confidence
Early wins can be a great boost to confidence but they can also lead the trader into believing beating the market is deceptively simple. The trader becomes highly “risk tolerant” which creates complacency and overconfidence.
There’s a huge difference between a positive mindset and being overconfident. The former is in control while the latter isn’t. Sooner or later reality will bite and the markets will take back all they gave… and more.
3. Being in denial
Not taking losses personally is an important experience we all need to learn. A positive mental attitude means accepting losses as part of the journey and moving on quickly.
Being in denial means hiding from the problem and assuming the market will come around to you.
But a losing position will tie up your resources: your money, your time and most importantly your mental energy. An extremely important skill is to know when to get out of that position and having the mental strength to do it.
The motto of the successful investment manager is “capital preservation first and last”. Good risk management is not only good for your wallet, it will also prevent sleepless nights and getting into highly stressful situations in the first place.
4. The market has it “in for me”
“The market never does what I want” is one of the most common complaints we hear from new traders.
When negativity sets in, a trader can often start believing that everything they do is doomed and that the market will always win.
Remember that the market is just a collection of people. It doesn’t have a mind. It isn’t your enemy or your friend.
Timing financial markets in the near term is extremely challenging even for professionals who’ve been in the business for years. That’s why strategies like day trading and scalping are especially difficult.
Longer term strategies that rely less on day to day market activity may be far less exciting but in the end these are often the ones that make the profits.
5. It must be a scam!
The trader with this attitude often won’t face up to their own mistakes. And when facing losses, the trader with an egotistical mindset will often begin the blame game: It must be the broker, the software, the platform, the market maker and so on.
While scams certainly do exist, the blame game often hides the real problem. This is invariably a lack of a trading plan with proper risk management and having unachievable goals.
The first step to a positive mindset is accepting responsibility that your trading decisions are your own and nobody else’s. That often means accepting some painful truths. Were my expectations too high? Did I control my risk properly? Was the plan followed? Did I have a plan at all?
Trading in financial markets always involves an element of risk. Remember that systems can be exhaustively back-tested and front-tested but they can never truly predict what will happen in the future.
Tips for Fostering the Right Mental Attitude
In all areas of life most of us try to foster a positive mindset. Though when a trader has any tendency towards a negative outlook, then investing with real money is likely to bring that negativity to the fore.
A positive mindset needs to be trained and nurtured if it’s to survive. Here are a few tips.
- Keep it simple
- Have a realistic profit goal
- Accept responsibility for your own decisions
- Accept that what worked yesterday, won’t necessarily work today
- Don’t take things personally
- Accept that trading in financial markets contains an unavoidable element of risk
Above all remember, tomorrow is another day: Go home, sit back and have a coffee. Taking a mental break will help avoid the cycle of negative emotions.