Developing a Trading Mindset
Written by Luke Kurtz
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.
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."
Most 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.
I am sure you have heard the market mantra of fear and greed, but what is greed?
Greed is desire. The reason you are reading this website and looking for trading knowledge is that you have desire. A desire to make money, win, impress, feel good, feel safe, feel secure, provide, prove something to yourself or others, altruism - be it sincere or misguided. There are many more reasons I could list that make us enter any field of endeavour.
Before you even start on the trading adventure….why do you want to trade?
If the answer is just “to make money” then I am sorry to disappoint you but it could be very difficult for you to achieve that goal.
Successful traders love the game and the personal challenge, the money is secondary.
Good traders are well grounded “together” people. They think in a logical, sequential manner and they do not identify themselves as only traders. Trading is what they do but it is not who they are. They are not emotionally devoid like robots. However, they have learnt to step aside from their emotions and view them with understanding not fear.
In their life they are a partner, father, mother, friend, footy coach, volunteer, mentor, kind and loving person. Those qualities are what they identify with - not just being a trader.
The above personal qualities keep them sane and relatively stress free through hard times at their trading job.
Trading requires challenging personal introspection into who we are. Then undertaking a healthy process to continually improve.
Examine your motives before starting and be very honest with yourself.
Before starting any project or journey you need to decide where you want to go. You may say again…“I just want to make money”
How much money?
What is a realistic percentage per year of your capital for a beginner to achieve in trading? What is required for you to do to achieve that?
Examine your experience in investing, trading, business, personal finances, budgeting etc. If you have little financial literacy then you have a big learning curve ahead of you.
Whatever your knowledge and experience, trading is very different to most careers. If you are very intelligent and experienced in other professions you may have to “unlearn” many things. If you have a modest educational background you may have to work very hard to learn what you need. Not only the technical skills but how to think with an enquiring mind. It can be very hard work for the inexperienced.
Start by reading websites like this one, read books and attend courses to gauge what is realistic and achievable for you.
Start with a modest goal so it can be achieved. I suggest your first year results should be one of not losing. If you do that you will be in the top 5% of the class, as around 95 % of traders either lose or break even. (one of my objectives is to improve those statistics through quality instruction)
Decide what time frame you will trade in, monthly, weekly, daily or intra- day.
In general, the shorter time frame you trade the harder it gets, the more proficient you need to be and the more stressful it is.
If you are not currently profitable and statistics show that will be most of you, I suggest you seriously consider weekly time frames.
Weekly will give you plenty of action to keep you more than stimulated. It also removes some of the market “noise”.
Whe the market swings about from day to day with the daily news, its called "noise". Normally by the end of week if there is a predominant trend - it often reasserts itself therefore making it easier to analyze and keeping emotions in check - avoiding the noise.
Monthly timeframes are not to be underestimated. Some excellent long term methods and systems work well on monthly time frames.
Most beginners are drawn to short term time frames mistakenly believing that more quick trades means more money. Wrong. Normally more trades means more work, time, stress, cost, errors and experience required. Listen to the above advice about slower time frames and consider carefully.
You need a method or a system to trade with. DO NOT trade without it.
Think of what you do now for a living. It will have a method or system you have learnt or been taught. Your current work is not approached in a haphazard way, rather with a sequence and plan to produce a certain result.
Trading is no different.
Before you place a trade you should know;
A/ why you are buying
B/ when you will sell
C/ how much you will lose if the trade goes against you
D/ if the trade is part of your overall strategy of trading/investing
Can you answer those questions in detail?
Because each question requires more than just one answer.
If you can't answer then you don’t have a method or a system. You need to have one - if you trade without a plan you will become "part of someone else’s". Those “someone else’s” is the 5% of winning traders profiting from the 95% of traders without a plan!
Although this comes under part of your plan, it is so important I have devoted a separate point to it.
Sizing is arguably the most important part of developing a good method. Apart from knowing and implementing your exit, position sizing will make a huge difference to your results. It will make or break your profits or losses.
Position sizing means “how much” you buy ( I will use stock as an example) not just how much in dollar amounts.
Stocks have different volatility. Some move up and down slowly, others fast. By putting equal dollar amounts (such as 10% of total equity) into your stocks you are not allowing for this individual volatility.
A slow steady stock requires a larger position size, a fast stock requires a smaller position size. Trading is about controlling losses much more that chasing big wins. A volatile stock that has been allocated an equal % size - such as 10% of your capital, can really damage your account if it plunges quickly.
Alternately, the slow steady performer does its thing and goes up slowly. However you should have allowed for this and bought a bigger allocation. So you lose big on the loser and win a little on the winner. You didn’t calculate the volatility of the stocks before buying.
Correct sizing based on volatility would have resulted in a smaller loss on the plunging stock and a bigger win on the steady performer.
There are many good books on position sizing and the different ways of calculating how many shares to buy. Read them or do courses until you understand the theory. Part of training with me is learning how to size well to maximise profits.
One of the big benefits of learning how to use back testing software is that you can experiment and get to see for yourself how much an impact position sizing makes to a method or system. This is also a big part of your training with me.
Drawdown is the maximum amount in percentage terms you expect your portfolio to fall during volatility. It could mean you get stopped out on all your positions during a falling market. If so, what is the maximum you expect your portfolio to fall before it recovers?
If you don’t know what your estimated drawdown is with the method you are using - then how do you know how you will react when it happens?
How much will you lose if the markets crash and all your positions get wiped out?
For example if you have 10 positions with a 2% risk on each one and they all get stopped you lose 20% of your capital value, are you prepared for that?
If your system has 7 trades lose in a row and each trade has a loss of 2% of capital, will you be strong enough to buy again after 7 losses and your portfolio is in the red and down 14%?
If the system you are trading has a previous maximum DD of 20% and you have not reached that level - then it is more likely you could keep taking the buy signals. If you have no idea of the maximum DD of your system - how will you statistically know when the system could turn in your favour?
My experience is that most people overestimate what what DD they can tolerate. If you think you could cope with a 20% drawdown then I suggest you halve that expectation to 10%.
I personally set my DD at 10 to 15%. When I first started trading I thought I could cope with around 35%, but when that happened I discovered I couldn’t. I learnt my resilience level was lower then first thought.
In general, the lower DD the lower the returns of your method.
Also, the higher returns - the higher the DD.
You will need to find a balance between desire of profits and the emotional pain of watching declining equity. It’s a personal thing - you need to find your balance and one of the best ways is to arm yourself with good information and learning.
Sticking to your plan is easier once you know what the probabilities of your plan are, particularly after you do the work described in points 4, 5 and 6. Even if you have been diligent and covered every possible worst case scenario and have developed a sound and high probability low risk method - your greatest challenge will be sticking to it.
Why? Simply because it is just a hard thing to do, we are human.
We have fear.
Fear of losing and fear of giving back what we have made. So we don’t take losing stops and we don’t take profitable sell signals.
Because we have fear.
So how do we stop the fear? Well the expanded answer is in my new book due to be published late 2021 or early 2022
However I can give you a couple of tips - but the work is really up to you.
Do the work in parts 4, 5 and 6, it will make you feel better and lift your confidence. Being well trained and understanding something reduces the feeling of the “unknown”. It is the unknown we fear.
Start small. Starting with small trades reduces stress and stress is the greatest inhibitor to clear thinking. If you are not thinking clearly you will react without thinking. Reacting without thinking will often cause you to stray from your plan.
Determine what level of fear and anxiety you have in your life. Everyone has some. If you can discover yours it will be a great asset to your trading and that’s why I recommend you do the following…..
Those who wish to and do perform at high levels in their profession treat their bodies and mind with the utmost kindness and respect. Pilots, surgeons, elite sportspeople, business professionals etc often surround themselves with dieticians, mentors , psychologists and anyone else they consider necessary to keep them in good physical and mental balance.
I (and many other successful traders I know) have found pursuits such as meditation, yoga, martial arts or a spiritual belief system to be enormously helpful. Even atheists traders have a healthy respect for maintaining the balance in their lives.
We are not looking for divine intervention - or expect to one day wake up and be psychic as to the movements of the market. However as a trader it is beneficial to learn how to be in flow with life, to not identify ourselves as traders but as people first, trading is something we do to earn an income to live life.
Trading is not our identity. Our identity is who we are as people.
Once this attitude is developed you will find it much easier to accept losses more calmly and to not get over excited with wins. You will be able to more observe the markets with an interest, like a non participant would, rather than get caught up emotionally in its sometimes manic behaviour.
You will need to seek your own way to be healthy, but you could start by improving what you eat, drink alcohol less, walk some more, breath more slowly and deeply and appreciate the little things in life more. Hot running water, a clean bed to sleep in and fresh air to breathe, are things we take for granted.
Trading can be a solitary and isolating profession which isn’t healthy for a species (humans) that need social interaction to maintain mental health.
So get out there and meet fellow traders! Do courses, attend seminars and club meetings, organize working groups to share knowledge and learn from each other.
Internet blogs and emails are good too but if you want to be challenged and really catapult your learning - you can’t go past doing it in person.
Trading tends to attract introspective and sometimes anxious types, often not really suited to the challenges of trading. However by meeting like minded people and being honest with each other (and yourself) it can help you move past those limiting beliefs.
Last but certainly not least.
Record keeping is one of the most disregarded and least attended disciplines in trading. I am as guilty as many. However I recommend it very highly. In fact its essential for your progress to review.
At the Australian Academy of Sport, elite athletes are taught to record all their performance statistics and review their psychological state regularly. You are now participating in an elite field of endeavour, why not model the experts?
Every trade you do you should “write up”.
Record things like the entry price and date, number of shares bought, the risk amount taken and where your position size calc was, your exit date and price, the loss or profit and what index the stock was in.
This work can be tedious. Although it is essential for you review your trades and see if you are sticking to your system. If you are not (highly probable) a review shows where you are making the errors and if there is a negative pattern. It will show your weakness and strengths, and highlight the areas you need to improve and work on.
The other thing I want you to do is keep a personal journal, this can be another column on your record sheet or a separate book or log.
Record your feelings! This is no time to cop out on this one. Write them all down. It may be “I had a fight my partner last night”, “I am feeling anxious about my sick mother”, “I am worried about this next power bill”, “I am sick of this trading, it wont work”, “I have doubts about this company”, “I have been winning consistently - gee I feel great”, “that bloke next door is a real dickhead!” Whatever it is, record it!
Because these intense feelings can affect your thoughts.. Remember “trading is easy but we make it hard” so it’s the recognition of the mistakes, the recording of the errors, the brutal honesty of your feelings that will make you more aware as a person and therefore more aware as a trader.
Even better, journalling will assist you in determining what you can cope with emotionally in the market. If you can cope with a portfolio pullback 10, 20, 25, 30, 35 percent or
if you can trade daily or weekly or cope with doing ten trades a week or ten trades a month or ten a year.
Journalling will show you that things like a fight with a partner at home can affect your decision making. If it was a disagreement about money, maybe your trading? You may be inclined to think “I will show em” and take a bigger risk then you should. If the trades a loss it will makes things worse, if it’s a win it can make things more worse by developing a false sense of ability and confidence - until the next loss.
All the above ten points are as important as each other. I would be doing a disservice to either point if I attempted to rank them in order of priority. Attempt to do them all the best you can and the pieces of the puzzle will come together for you. It is really up to you, or you could say