Being a successful trader used to be about brawn and aggression. But now that it’s all about controlled and considered mouse clicks, your trading strategy needs to include trading psychology tips that help prevent reflex actions and promote conscious preparation. Read on for ways to control unhelpful impulses and stay in the profit zone.
It all comes down to your mindset
It doesn’t matter what analysis methodology you follow: if you haven’t got your feet firmly routed to the ground it will be luck whether you profit or lose.
Traders need to know that the only thing you can control is you: even tracking the smart money by using Wyckoff VSA won’t give you an edge if you don’t know what you are doing and making sure that it is the most helpful thing to do. Here’s how to strengthen your trading mindset.
1. Know yourself
Self-awareness is the first step. Do you know what mood you are in as you read this blog and how it has affected your behaviour today? Are you alert to when you are getting stressed, emotionally activated or reactive rather than staying focused and objective? Do you know your personality type?
Tests show that people are not generally good judges of their own character. The human mind goes to strenuous lengths to avoid seeing itself. Thinking errors like cognitive dissonance maintain this in place. So educate yourself by recording, reviewing and troubleshooting your behaviour.
Consider when you don't do as well, Is it when you are tired or spent too much time at the screen? Is it when you first start trading for the day? Is it when you find yourself on the wrong side of the trade and start revenge trading with money you can’t afford to lose?
It’s also about being aware of your own physiology (check out the information on body scans below).
‘Be aware of it and how you feel - I notice my body gets tense when I lose more than a certain dollar amount. It physically hurts,’ comments Lauren Snedeker, Director of Education at Tradeguider.
Knowledge is not power, the application of knowledge is. The people who do well in life are not threatened by the idea that they make mistakes. They own them, hold them lightly and learn from them. So help yourself: use mindfulness techniques to know yourself. Tap into changework techniques to change your behaviour for the better and have that winner’s trading mindset.
2. Managing risks
Let’s face it. If you are fundamentally uncomfortable with risk and uncertainty, it's going to be hard to stay positive in this business. Trading is about being unfazed by losing money.
(This is also a fundamental life skill since the only certainty of the human existence is change. No one knows the future.)
Strength comes from flexibility. There are things you can do to be a more flexible thinker so that you stay grounded even if you are on shaky ground.
‘For example, fine tuning your trade entries will help you handle the uncertainty of making a trade’, says Lauren.
And once again it’s about staying mindful – are you looking for market action that seems to confirm your position? Are you aware of the tendency to want to overlook action that contradicts it? This might lead you to stay in losing trades too long and take unnecessary losses.
‘Trade what you see, not what you want to see. You have to be willing to not take a trade every day,’ says Gavin Holmes, Tradeguider CEO and trading mindset champion. ‘That should be part of your plan.’
Focus and confidence needs to be maintained even if a trading session doesn't lead to profits. Be comfortable with the possibility of being wrong.
In this way you can learn to influence your future rather fight the losing battle of trying to control the uncontrollable.
3. Know your limits
Ok, so you have examined whether you are fundamentally ok with the uncertainty that is inherent in trading. You have been honest with yourself.
Do you know how much you can afford to lose before it affects you negatively? Do you have 2% rule or is it a dollar amount?
‘You can always have a trailing stop put in place to cover the market moving against you but it's about your ability to handle the market moving against you in real time in real dollars that is the key,’ says Lauren.
These limits can be adjusted to be more cautious: or instance, you can always tighten your stop losses when you first start your trading session, says Lauren.
But this isn’t just about stop losses and risk management skills. Lauren also talks about other limits like how long we can spend in front of a computer screen, or when we get too tired to trade. Or when challenges in our personal life mean we are less likely to make calm, collected trade management decisions.
And Gavin talks about your trading space as being the most important factor. Is the room where you trade conducive to focus? Do you have defined times of day you trade when you know you won’t be disturbed or you are best at the trading mindset?
Analyze this as you would your favourite asset class and be objective about what you find. Make your space help your decision making process.
4. Be analytical, not emotional
Emotions drive everything we do. They even drive our decision to be analytical rather than emotional. Choose to develop your objectivity and don’t take losses personally: they happen to everyone. You also want to know the difference between a bad trade and a losing trade so you can avoid the former.
Cultivate the state of non-judgement, non-attachment: don’t get too excited about winning or too upset about losing. Being like the farmer in this story.
Don’t get too attached to anything whether it’s a particular trade, or a way of analysing the market. (or even when the pandemic is going to end). Let the maths speak for itself.
It’s a numbers game but if your emotions about your performance yesterday are impacting you negatively as you trade today, you’re already on the back foot.
So have a think: do you have unrealistic expectations? Do you get frustrated, disappointed, stressed, angry? When do you feel overwhelmed. This is the time to pull back from executing any trades.
How calm are you when you click the mouse to enter or exit a trade? Tap into how your body feels: is your jaw tight, are your shoulders hunched. The body and mind are inextricably linked.
5. Stick to your trading plan
So, having a good trading mindset is about having a good attitude to risk. It’s about staying calm under pressure. But if there’s no procedure, no rule book, no steps to follow, then you are setting yourself up to fail.
This is for when things are going well as much as when they are not. ‘When the market is in my favour but starts to change or correct a little I would in the past doubt myself, explains Lauren..’ Now I arm myself with my checklists, my strategies and do what I know to be the most effective.'
It’s easy to follow the plan when things are going well. Make sure you follow it when things aren’t. We know tired or stressed brains aren’t as good as making decisions as when they are rested so this is where your plan will have your back.
Of course there is a difference between having a plan and sticking to it. This is a universally human challenge. But you can train yourself to be better at this. When you find yourself jumping into uncharted behaviour off-plan, make a note of it in your journal. Consider what circumstances prompt this response.
You can then be aware of any unhelpful habits you engage in when triggered and mentally rehearse doing things a better way when those circumstances arise. This solution-focused attitude to your trading mindset will pay off when you have to make a quick decision.
6. Remain patient
Your profit depends as much on how you manage the trade once you are in it as what your market analysis is like.
Don’t look to get all the profits at once. ‘If you make your daily profit target, congratulate yourself and walk away,’ says Lauren Snedeker. ‘You may get to a point when you are really efficient and it takes less time to make that figure.’
Also keep out of mediocre trades that take time but have minimal gain, she says.
‘No one wants to be sitting in front of a screen for 5 hours thinking “I’m not making money”’, says Gavin. “They just press the button because they are bored,” he observes. ‘But there are days with no trades and other days when the markets give you everything.’
Again it’s about equanimity.
The same principle applies to Wyckoff VSA: If you are new to it then know it’s not an instant fix, Gavin warns. ‘It takes time to recognise the massive volume spikes’, he says. Accepting that timescale rather than imposing your own is key.
Don’t believe the hype about positive thinking: look into positive psychology instead – it can be less oppressive. Develop an even-tempered approach to being able to look at your wins and losses in the same light: an opportunity to learn more about yourself and how to run the machinery of your mind optimally.
Just because you got stopped out on a trade doesn’t preclude trying it again, if the strategy was right but the timing was wrong.
A trader who fundamentally believes they are a good trader will see this. Those with consistent self-doubt will hesitate, miss trades, cut profits short etc. Train where your attention goes as the negativity bias is a potent force behind our mindset: note what you are doing right as much as what you are doing that could be improved.
Positivity is also maintained by having a balanced life and not getting burnt out. Look at your sleep and diet, consider whether your primal emotional needs are being met. Make an active choice to make the best decision in each moment, rather than defaulting to the comfortable and familiar.
Where positive thinking might lead you to berate yourself when you make a mistake, positive psychology can help you to be compassionate and patient with yourself as you learn. This way positive self regard and positive expectations of your trading will have a measurable effect on your bottom line.
Summary: All in balance to avoid burnout
It’s about having a balanced life, a grounded attitude and an open, inquisitive mind that questions the constant propaganda our minds feed each of us.
Yes, this is basically mindfulness so avail yourself of one of the many online resources available such as Palouse or the apps Calm and Headspace.
But don’t forget the mind-body link: equally important is learning how to do a body scan: these are included in the above services but you can find these on YouTube by luminaries such as John Kabat Zinn or Mark Williams.
Back in the trading world, if you go to our Resource Center you’ll find more guidance on how to have the best trading mindset possible, how to make a trading plan and so on.
Sometimes it takes work to see rest and mental training as being equally important as other kinds of productive work. It is though and it not only makes us work better but we have more time for fun.
Which should also be part of a good trader’s plan.
Tradeguider is the home of Wyckoff Volume Spread Analysis. We’re passionate about mindset as anyone who has heard our CEO, Gavin Holmes, knows. We’re also passionate about Wyckoff VSA and believe it’s the other key piece to your trading foundations. We know it gives undeniable results to traders of all descriptions. So come and see a demo or watch some live trading and see how it all fits together.