There are a record number of people wanting to make money trading. The technology we have today makes it relatively easy to do. Anybody can master the mechanics. But, what is not always easy to control is the “mind game” aspect of trading.
Don’t underestimate the importance of having the proper mental approach to trading. Go beyond just wanting to know “how to do it” to realizing that you have to be mentally ready for it.
The proper mind set that I’m speaking of here is the result of self-discipline and habit. Without exception, all consistently profitable traders have it. Some developed it the hard way, and for some it came easy. But none of them started trading, and went on to have success, without having these 7 habits drilled into them one way or the other.
It takes 21 days to break an old habit or start a new one, or so the story goes. But, keep this in mind as you read on.
Before you can develop these 7 habits you must first understand the Trader’ s Mentality. The trader’s mentality is to look at the stock market, and other markets, as a profit-generating phenomenon in motion. It’s a happening. They don’t have an investment mentality. They don’t read company profiles, look at charts, read about management, study product development, study the competition, look at the P/E ratio, the company’s balance sheet, press releases, earnings history, etc., etc., etc., before they trade. They don’t do any of that, plain and simple.
They just do it. If they did any of those things, they wouldn’t have any time left over to do any trading.
Traders simply look for potential price movement. Traders realize they don’t make a dime studying balance sheets and P/E ratios. Their focus is on consistent trades with as little risk as possible. Short-term traders like day traders and swing traders look for moves they can make in the here and now. The trader’s focus is on “what’s happening now and how can I profit from it” as opposed to the investors focus of “how will a company’s stock price rise over time.”
Now that you fully understand the trader’s mentality, let’s take a peek at those 7 habits …
Habit #1: Trade only with risk capital.
Many people start trading with money they can ill afford to lose. We call it “scared money.” That way, the fear of loss far exceeds any desire for gain, and they trade in a state of nervousness and anxiety. A set-up for failure from the get-go. The proper way to start out with your trading is to determine how much you can comfortably afford to lose financially, and then, from that amount, determine how much money you can afford to lose emotionally. Financially allocating an amount of money for risk capital is very much different from emotionally allocating it. Anything can and will happen in the market. Develop the habit of only trading with money you can afford to lose financially and emotionally.
Habit #2: Accept full responsibility for your own trades.
Successful traders always take full responsibility for their own actions in all aspects of their lives, and when it comes to trading they’re no different. In today’s day and age it ‘s easier and more convenient to blame others for our actions or to lie to ourselves. There are many examples of people not wanting to fess up, and take responsibility for what they do. Successful traders realize that their success or failure is all their own. While it may be convenient to blame the specialist for screwing them on an execution, or blame the day trading stock pick tips service for a string of bad picks, the ultimate responsibility for their actions falls directly on their shoulders, and they know it. You can learn a lot from an experienced trader, but your results are the result of your actions.
Habit #3: Focus on one or two techniques that Work.
Rather than constantly searching for new strategies and techniques, the profitable trader will consistently apply one or two approaches and absolutely nothing else. New traders often get in the habit of constantly searching for new things to try before they’ve even executed one trade with a proven strategy they’ve read about somewhere. They buy someone’s book, then another, and yet another before they end up with a dozen books on trading without having performed a single trade. Or, they’ll trade stocks, then switch to currencies, then switch to commodities, then something else. And so it goes. Most professional traders use only one or two techniques at most – and nothing else. Some days are better than others for them, which is true of all trading, but at no time do they even remotely consider trying something else. Even the most average of techniques, when executed with focus, will yield better results than the technique-du-jour if you’re changing styles every week. Find a system that works and work that system to death. The grass isn’t greener on the other side of the fence. It might just be moss. Learn your market, refine your personal approach to it and stick to it. Period. End of discussion.
Habit # 4: Properly manage your trades.
Without exception, every trading author on the face of this earth says that cutting losses is one of their “cardinal rules” of trading. But, if you’ve ever traded, you know how your own mind can work against you when it comes time to sell at a loss. You ‘ll start rationalizing why you shouldn’t sell. “It will come back for sure.” “It’s just a temporary setback.” “I’ll sell when it comes back to the price I paid.” I’m sure you’ve heard it all before – you talking to yourself about that trade that’s gone wrong. Take your pick of excuses, but none of them are the right way to think, and the next thing you know you’ve got a nightmare loss on your hands. Everyone has had this happen to them in the learning stages. Successful traders identify their profit and loss parameters before they enter a trade. They set their stops and stick to their parameters.
Habit # 5: Stay emotionally neutral.
Successful traders don’t get too high when they have a winning day, and they don’t get too low when they have a losing day. Taking a loss is as much a part of trading as is taking a gain. The difference is in how you emotionally deal with the losses and the gains. The market goes up and down constantly, but successful traders don’t come home and kick the dog after a bad day in the stock market, or any of the markets they’re trading for that matter. Nor do they rush out and buy a new BMW after they’ve had a good day, although there is that temptation. Take it from one who knows – and owns a BMW. Successful traders don’t let the stock market, or any of the other markets, put them on an emotional roller coaster ride. Staying emotionally neutral is the key to long term trading success. New traders often experience “burn out”, which is more a result of emotional ups and downs than anything else. Don’t buy into the hype that is constantly coming out of Wall Street. Don’t get scared when the market drops or pop the champagne when it roars higher. Just trade it. Save your emotions for the things that really matter in life like family and friends, not trading. Well, you can get a little excited about the BMW. After all, there are rewards in life. But, you get the point.
Habit # 6: Trade without certainty.
Successful traders are comfortable with risk. They know that they can’t always wait for certainty that the trade will be profitable before they do the trade. They trade in anticipation of a pattern or event. This mindset is extremely difficult for new traders. New traders want all the facts before they do a trade, and by the time all the facts are in the trading opportunity is long gone. Then, they finally get around to putting the trade on and end up sitting there wondering why it didn’t work out. If you’re going into town and you need every traffic light to turn green before you leave, you’ll never get out of the garage. Accept the fact that you won’t have advance proof that a trade will work. Get comfortable with risk and learn how to manage it.
Habit # 7: Keep a trade journal.
Successful traders keep a trade journal of their trades, and periodically review it as a way of refining their approach to the stock market, or whatever market they’re trading. There is a tremendous amount of valuable information in your losing trades. Sometimes, you can spot easily identifiable patterns in your losing trades that can be eliminated. When reviewing their trade journals, successful traders don’t think of them as profits and losses, but simply results. Just because you have a loss doesn’t make you a loser, and just because you have a winning trade doesn’t make you a winner. Successful traders use their trade journal to learn about themselves in an objective way. They realize that their trading activities produce results, and that the results hold valuable information about themselves. They offer the keys to improving the results of their activities. Keep good notes on each trade and review your notes often. It will help you trade better.