Trader Mentality & Psychology

The craziest thing I've seen on this forum - is that there are such little threads about trading mentality & psychology. I would say it easily accounts for 60-70% of becoming a successful trader. I'm going to share some of the important mentality and psychology lessons we teach at our firm in this thread and provide you guys some insights into professional trading.

I'll address some common questions you may have first:
2. Why are you sharing this with us? - I like helping people and I've thoroughly enjoyed teaching current junior traders at my firm, and I'm also now stuck in a position which is likely to take up the next hour or two so, why not?
3. How often will you update? - I cannot promise anything, a trader's life is hectic to say the least.
4. Why don't you teach us your trading strategies? - first of all, they are proprietary and thus we like to keep them in-house. Secondly, I don't trade the FX markets and our strategies are very market specific thus it would actually be quite useless for you.

Trading Psychology - a blackjack analogy

Amateur traders try to make money, professional traders try to make good trades

The most important aspect of trading psychology is to understand and accept that trading is a probability based activity. Which means the outcome of the trade is outside of your control and anything can happen. Your job as a professional trader is to make good trades. A good trade is a trade with good edge (edge being defined as something that brings your probability of success better than 50%) and solid risk management. Edge is different in every trading style and market but outside of specific strategies, your flow / marketing reading skills, pattern recognition, execution speed and accuracy all contribute to edge.

Thus, let's assume you have defined and tested your edge, then your job is essentially the same as a blackjack dealer for a casino.

The blackjack dealer knows he has absolute edge - 51% (give or take depending on rules). The owner of the casino doesn't hire him and say to him 'make me money'. the blackjack dealer's job description is to deal the cards in the correct way and play out the game as the dealer in a correct way as the edge is absolute and as long as he does what he is supposed to do, he will make money in the long run. If he deals out 5 hands and then busts as the dealer, he doesn't go and complain about it, he doesn't stop dealing for the day, he doesn't blame the game or the table or his own hand. He simply keeps on dealing.

Trading is very similar - except you have to define your edge first. Once that is done, you simply take all trades with edge irrespective of the outcome. Your job as a trader is to do good trades, you make money as a result but that isn't your direct job. The reason this distinction is important is when you view your job is to make money, losses start to affect your decision making, you start getting into bad habits of 'revenge trading', 'fear', 'stubborness' and all the vices of trading psychology. You start taking losses personally and let it affect your decision making - losses are part of the probability.

Why is this analogy easy to understand? Because people accept the outcome of Blackjack (without card counting) is random but often have trouble accepting that markets are random.

The point of this analogy is that once you have spent time to define your edge, the outcome of individual trades will become irrelevant and you should only evaluate yourself based on whether you executed according to your plan and if there were edge in the trade.

I won't go into details regarding edge in this post but know that edge is not just some winning system/indicator, your skill and ability to read the market flow and execute a strategy is equally if not more important than the strategy itself, which takes time and deliberate practice to improve - too many people get a platform and just start trading and wonder why they don't make money. Remember this, you are all trading the same market as some of the smartest people in the world who have done this for 10-16 hrs daily for decades.

The greed demon is the number one enemy of forex traders. Greed can be devastating to returns, because a trader always runs the risk of getting whipsawed or blown out of a position.

I agree, there is so little discussion about trading psychology, even though it is the most important factor in trading success imho.

The reason is probably to do with the fact that dealing with mindset-stuff is a lot harder than concentrating on the nuts and bolts of trading systems etc.

Same in all aspects of life really. Also, mindset is a very personal thing and it's very hard to help other people. Working on mindset is very private work as only the individual knows what's going on in his/her head.

Good analogy. Enjoyed reading it. Hopefully you will post more. Most threads emphasizes on trading system, almost 95% are looking for system that will give them best entries, but nobody seems to understand that entry is not important here, how we manage the trade & exit is more important than that. Because in the end it is just probability, either you win or lose.

Best Regards.

Absolutely true. Take all valid trades (i.e. all those with your identified edge) with careful risk control and let the net profits accumulate with time. I can't tell you how long it took me to focus on taking good trades rather than trying to make a profit - but it was the turning point to consistent profitability.

The instinctive human need not to be wrong, not to take a loss, is really powerful and is a very common underlying reason why so many traders fail, even when they have actually sensible, positive expectancy, strategies.

Umm, the best entry is the one giving your trade the best edge (ie. the best probability to win).

The other big obstance is, in my opinion, fear. Those are two driving emotional forces for a lot of traders, and knowing how to curb your impulses and trade rationally is immensely important.

I went to a trading meetup in my city the other day. Though the topic was mostly dealing with delayed gratification, the audience consisted mostly of young adults. After talking to some people, I got the impression that most people there were into trading to "get rich" and afford a luxurious life. Needless to say, those people were beginners and probably made some CFD brokers very happy by now.

Personally, I don't know many successful high-frequency traders. But those that I do know, traded because they enjoyed making good decisions. And by successful, I mean that they've been riding on a positive equity slope for a long period of time. Still pretty far from where most beginners imagine themselves 2 years after installing Meta Trader.

too fast to open trade is one of trader mistakes...It's better late and profit than fast and bankrupt.

The reason people lose money is not because of psychology, it's because they don't understand the game and how it should be played. Psychology counts as much as you have a winning method.

I bet you don't know many long term successful traders either. Just be cause somebody is "successful" long term trader does not mean he/she is actually successful. Usually it means they don't have enough samples (trades) to prove they are not successful and since they were lucky to start with couple positive positions and maybe even book some profit, they think they are successful.

Ask any long terms "investor", buy-and-hold guy, how are equity profits for 2018

In my opinion both are important. You may have a good strategy, but if your fears are precluding you from following it the results won't be positive.

I didn't say psychology don't count, I said strategy is more important than psychology. You can have the right psychology but no edge, all that means is you going broke much slower.

I also think position sizing is more important than strategy. But I will remain reserved on that. I think success in the market is all about position sizing(risk management).cheers

finding a system with an edge isnt difficult in the market.....but having a sound psychology is the reason people fail...setting your rules and following them is what makes a great trader...

Both are equally needed but when talking about which one is important, psychology is the most lacking point here. Good Strategy is for emotionless, and it can be spoiled anytime by any kind of bad psychology applied. it's important to clear up the thousand behavioral issues before talking about good strategy. I'm giving psychology a more important lesson than strategy for becoming good trader.

I think this is more of a hen and egg situation, because the same can be said about having the strategy but not the psychology to make use of it fully.

Trading Mentality - An MMA Analogy

In this post, I'm going to talk about the mentality of becoming a trader, it's probably more relevant for newer traders but serves as a good refresh for more experienced traders.

Typically people go into trading with the wrong mentalities with puts them down the wrong path, these include:

1. Focused on finding a good strategy
2. Focused on finding some winning system
3. Focused on making money

Why? Because it's easier to do so. People want results before they've put in hard work, people want a system to tell them when to enter so they don't have to think and/or feel the emotions of going heavy offside, or they can also blame the system afterwards. Don't get me wrong, strategies are important, but if you cannot execute the strategy it is worthless.

Trading is a skill

It takes time and deliberate practice to improve, you need to do honest reviews after each trading session and look at what areas you need improvement on, what skill are you going to work on tomorrow? These skills include:

1. Market reading
2. flow reading
3. pattern recognition
4. execution speed and accuracy
5. risk management
6. emotional management

All of which are crucial to executing a strategy - if a strategy did not require you to have any such 'skill' inputs, this strategy is at best going to be useless when the market conditions change as it has no 'adaptability' to it, and at worse, just a scam.

This mentality that trading is a skill, that you need to spend time and effort to improve on it is the most important thing I want to address. There is no magical solution - Identify what needs to improve, work out an improvement plan, deliberate practice it, review and repeat. What new (and experienced) traders need to focus on more than anything is becoming 'better'.

Fighting Analogy

If you decided you were going to become a professional fighter and compete in the UFC, what would you do?

1. You'd find a gym/coach, maybe several depending on what disciplines you need to learn
2. You would (assuming zero experience) start by learning the raw basics, stance, movement, very basic punches/kicks with a pad trainer
3. You wouldn't really go into sparing until a few months in.

Now, let's compare that to what most people do when they decide they're going to become a trader:

1. Are you focused on finding the best combo? No because there is no such thing - it all depends on the skill of the fighter
2. Are you focused on winning fights straight away? No, because you realise the skill gap and is focused on improvement rather than winning
3. Are you just going to walk into the UFC right (assuming they let you) and fight at the highest level straight away? No, you'd get cremated and embarrass yourself

So why do people do it in trading?

1. They don't realise they're competing against the best, the smartest people in the world who has been doing this 10-16hrs a day for decades
2. The act of trading, i.e. moving the mouse and clicking on a buy or sell order it's very simple, no one can tell you don't know what you're doing, your click is the same as the best trader in the world, you might even get lucky and have the trade go your way. Now you're thinking this is easy, I've just made money, why do I need to 'improve' anything.
3. Those that recognise what it takes perhaps just don't have the time / mental commitment to become better, I will put say this now, there is no 'part-time' trader, well not a successful one anyway. (not to be confused with investors)

For those who still believe in finding the 'right' strategy or system, I share this with you. We trade in a style which if you had to give it a name, I would call it Intraday Market Neutral Arbitrage at the firm. The strategy isn't very difficult and can be taught in around 4-6 weeks full time. However, only 1 out of 10 traders move on to become a senior trader (>$500k year) whilst at least 6 never make a cent. It is the exact same strategy we teach all traders. Why would there be a discrepancy of the same proven strategy?

Exactly right. Trading is a learned skill much like any other skill-based profession. And in all cases the learning takes thought, application, dedication, perseverence, practice, experience and adaptability.

I imagine there must be people out there with an innate gift for trading, like music for Mozart, but you still can be a competent musician without needing to be Mozart, and a consistently profitable trader without being born gifted, provided you are willing to work at it to improve your skills to the required standard.

It is always good to have talent, but what one lacks in talent they can always compensate with skill, if they have the patience and dedication to develop it and that applies to anything you choose to do, not only trading.