The Trader’s Mindset – Trading Psychology

As a trader, your mindset is essential to your success. Last week, we talked about how traders have to be highly disciplined. But it’s also essential to understand how probabilities work, and how your mindset can set you up for success in the long run.

Four important rules that you should internalise

1. Anything can happen. The next event in the market is going to be random, no matter how high the probabilities are.
2. You don’t need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

We often apply these four rules in real life, but forget to apply them when we trade. If you had a shop, for example, you won’t know if people are going to come in today and spend money. You don’t know if you’ll be able to make a profit on that particular day. But based on your knowledge of your business and the markets, you are confident that if you keep opening the doors every day, in the long run, your business is going to be profitable. That’s how you have to approach trading as well.

You have to have your system in place before you place the trade that allows you to turn up to do your trade, while knowing that not all trades will be winning trades. If you don’t set up these rules beforehand, it becomes very difficult to think rationally as soon as there’s money at stake.

Thinking like a trader

Thinking like a trader can be a challenge. If you follow these four steps you can set yourself up for success by training your mind and your confidence to trade by your rules, no matter what happens:

1. Build the self-trust necessary to operate in an unlimited environment.
2. Learn to flawlessly execute a trading system
3. Train your mind to think in probabilities
4. Create strong, unshakable belief in your consistency as a trader.

How to become a consistent winner

Many traders say they’re good at technical analysis or at analysing the market. But another very important skill is to be able to take a hit. It’s essential to be able to do what you have to do in the moment and take the occasional loss without losing confidence or changing your system, and to be able to control behaviour when things don’t go the way you wanted them to go.

These five behaviours can help you become a consistent winner:

1. Objectively identify your edges
2. Predefine the risk of every trade
3. Completely accept the risk or be willing to let go of the trade
4. Pay yourself as the market makes money available to you
5. Continually monitor your susceptibility for making errors
6. Understand the absolute necessity of these principles of consistent success and therefore never violate them.

 

The concept of trading psychology is pivotal. Every time you lose confidence or don’t follow your own rules, you will pay the price for it. It’s very tempting to break your rules in times of weakness, if you for example have a lucky streak or if the market is suddenly doing something different. But it’s important to control your behaviour. It doesn’t matter if you’re right in the moment. What matters is that your trading system will make you money over time, and that’s why you need to stick to it.

 

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