Developing a Trading Mindset

Written by Luke Kurtz (Luke is a freelance writer interested in trading - Peter)

In order to be a successful trader, it's necessary to develop the right skills. Traders must be able to assess companies and make predictions about how certain stocks will trend. While technical skills are important, it's more important to have the right mindset.

To build wealth, traders must keep their emotions in check. Patience is vital, but traders should also be able to think on their feet.

Anxiety, impatience, and greed are the enemies of the trader.

Thinking On the Fly

Traders frequently must make significant decisions at a moment's notice. In order to do this, they need to learn to stay calm, even when there's a lot at stake. On top of that, they must exercise self-control, even when it's tempting to step away from trading plans. When emotions take over, it can lead to losses. How do you do that? You learn from a Zen master who also happens to be a trader.

Avoiding Fear-Based Decisions

It's normal to feel anxious when negative news about a stock or the economy rolls in. However, as traders, you should be able to keep you nerve when buying or selling stocks, especially in light of the news. Liquidating could prevent losses, but it can also keep traders from enjoying gains.

When we feel fearful, it's because we're reacting to a potential threat. The threat of losing investments can be difficult to deal with. In other words, we’re fighting against our own mind.

That's why it's helpful for traders to assess the source of their fears. It can be useful for any trader to think about what they're worried about and why. With that said, traders shouldn't ponder these things right after they've received bad news. Instead, they should consider their fears when they don't have anything specific to worry about.

If traders go through this thought process in advance, they can get a better sense of how they see events. This can help traders to avoid emotional reactions when they get bad news. It can be hard to stay calm in these scenarios, but keeping your cool is crucial if you want to build a strong portfolio.

Don't Get Too Greedy

It’s easy to say that. And of course, in normal times, we don’t get too greedy. But in normal times, we also don’t get high reward. It’s during crazy times or desperate times that makes us greedy and fantasize about getting rich quick. There's nothing wrong with it. However, if you let yourself get too greedy, you might miss out on profits. No stock will trend upwards forever. Eventually, the stock will trend downwards, and traders that were overly greedy will lose out.

It can be hard to get past these emotions. Ideally, traders should create a logical, research-based trading plan. But we’re controlled by our emotions. And who controls the emotions? The Mind. Yep. You’ve got to learn to master the mind.

Establishing Rules

The pressure of trading can be intense. That's why it's best for traders to come up with rules ahead of time. You can create guidelines that take your own tolerance for risk into account. Follow these rules when deciding when you should enter and exit trades. Have a profit target in mind. If you set a stop loss, you'll be able to make decisions that aren't based on your own emotions.

Beyond that, you may want to think about events that should influence your decisions about buying or selling stock. For example, you may choose to buy when a positive earnings release comes out.

Determine how much you're comfortable gaining -- or losing -- per day. If you've established your profit target, sell and stick with what you've earned. If you've lost a certain amount, it's time to call it quits.

No matter what you decide, you'll be able to keep on trading.

The Importance of Research

To trade successfully, traders must study both stocks and significant industries. Not only should traders follow news and investigate stocks, but they should go to conferences and trading seminars as well if they can.

It's best to set aside time for research. That way, you'll have time to flip through trade journals, conduct industry analysis, go over charts, and do other types of research. When you're well informed, it's easy to push aside your anxiety.

Flexibility Is Crucial

While traders should establish guidelines, they should also be willing to experiment. Experiments can help traders to gain valuable knowledge. As an example, you could try using options to see if it works for you. When you conduct experiments, you can focus on results. This can help to limit the influence of your emotions.

Lastly, traders should examine their performance from time to time. It's important to review positions and returns, but traders should look beyond that as well. It's important for traders to gauge their progress, look at how well they've kept up with the market, and ponder what they can do in the future to be more successful. Self-conducted performance appraisals can be a way for traders to identify missteps, improve their process, and increase their returns.

Thanks for reading, Luke Kurtz.

A little more from Peter:

Trading is about using probability. To win at trading you need to put probability on your side. Like any other pursuit in life, the more knowledge and experience you have - the easier it is to be successful.

However, trading involves a unique challenge.

Trading engages the two strongest emotions we all have, Fear (anxiety) and Greed (desire).  You need to understand this "humaness" as it will be a huge part of your learning curve in being a trader. This is why one of my favourite sayings

"Trading can be easy, but we make it hard."

Why isn’t making money on the stock market easy?  Trading can be easy but we make it hard because we are human. One of my first trading teachers said to me that trading will find any challenging emotion you have and direct itself straight to your vulnerabilities.

Markets are the representation of emotional animals.  They represent the hopes, dreams and fears of all its human participants. Let’s face it, humans can be pretty stupid and unpredictable a lot of the time.  They can be selfish, greedy and fearful, even if they don’t know that.

Your job as a trader is to be not stupid, nor greedy or paralyzed with fear. Sounds easy but its not. Unless, you know yourself inside out.  It won't matter how intelligent you are, well educated or experienced in business, trading will chew you up and spit you out if you can’t be honest with yourself and recognize your emotions.

We tend to trade according to our beliefs, instead of trading just the market as it is.  Recognizing who you really are and and being truthful to yourself unlocks the confusion. The confusion about why you keep losing, or can't produce a steady upward equity curve.

It won't matter how a good a system you have or how strong a stock is.  If you can't fundamentally or technically implement the methods of YOUR selected system (because of yet unknown fears and desires) you will lose - nearly always because of self sabotage.

Here is an interesting statistic: home-based women traders do better then men.  Sorry ladies, it’s not because you are more intuitive but because you are more risk averse and security conscious. That is a good mindset for beginning traders.

Men have a different problem. They take too many risks and too quickly, often resulting in losses.  Women and men need to learn from each other (surprise, surprise!). Men should be a little more careful and diligent and women a little more assertive and confident with their trading.

"We make trading hard because we are human and you can't escape that fact. You can get around it the best you can and that’s where I can help. You need an experienced person telling you the reality, not a salesperson selling you a get rich quick scheme."

thumb iStock 000002067017XSmallMost trading courses sell the dream:  “Learn from us, make lots of money, live a life of ease, just trade daily and make quick money.  It's simple, do our course and get the knowledge”.  That's BS. Trading schools and market musketeers know what people want to hear, so they give you what you want. An easy fix.  Most people spend their life getting what they want even if it’s no good for them.

You must keep your trading simple and avoid creating dramas.  Doing risky trades is asking for dramas. Nations can create drama by taking risks in aggressive foreign policy.  If you come home drunk to your partner and act unreasonably, you are taking the risk of creating a drama.  Buy shares worth half of your entire portfolio in a volatile small company looking for a quick buck via a day trade, and you are also creating a drama.

"Some people love drama - don’t be a trader if you are one of them."

The purpose of this website and my training is to not just focus on trading technique.  Naturally it will contain some of the elements of trading you need. More importantly it's purpose is also to focus on you as a person - developing your mind to be aware.  Lack of awareness is the reason many stray from their system when the markets are challenging, perhaps after a string of losses, a draw down in capital or a lost opportunity. These are experiences that you WILL have. Trading isn't just a numbers game, its also arguably the best self development course you will ever do.