Learn effective trading psychology techniques to improve your decision-making skills, control your emotions, and develop discipline for successful stock market trading.
“Many people work hard… …the successful ones are the ones who work intelligently.”
I phrased it earlier (in the The productivity trap) this way:
“WHAT to do and HOW to do is more important than the amount of things you achieve.”
Or again in other words:
“It is not enough to work hard, it is important to work on the right thing in a good way.“
An old phrase also says: “Switch on your brain before you do something.“
In the last weeks I have seen pretty good examples where people worked hard on solutions where the goal could have been achieved better and easier by thinking simpler and different.
Another phrase says: “It’s lonely in the saddle since the horse died.“
There are mainly three different trading approaches:
1. Trend trading (often long-term oriented)
2. Swing trading (often mid-term oriented)
3. Scalp trading (short term oriented)
Of course it is possible to trade in every of these fashions, but for starters this can be really difficult and it is better, in my opinion, to choose one of them. This is due to the fact, that they have very different characteristics, which I will elaborate on in the following.
Trend trading:
This approach is mostly longer-term oriented, although some of you might say, you can also follow a trend on the basis of a 30-minute chart. Of course, you can! But for me these short-term movements are more a directional bias than a real trend. Think of this: On a 30-minute chart you have identified a trend (higher lows). Switching to a 4-hour chart can then perhaps show you, that this is just a correction from the underlying trend. So for me “real” trend trading is more long-term oriented, starting with approximately 1-day until several weeks. This trading style should fit people which like to hit “big winners” and can afford to have many “smaller losers.” You see this is also some kind of philosophy question you have to ask yourself! Can you personally take many small losses in your account (because this is what it mostly takes) AND can you let your profits run? For me personally –especially in the beginning of my trading career – this was quite difficult! Constantly taking these small losses, even though overall you are profitable, can really get into your head, causing you to make wrong decisions. But if you can say for yourself, that you can handle this stress, trend trading is possibly one of the most rewarding trading techniques. The advantages are that it is quite easy to learn and to execute, and that it needs not that much actual time at a PC.
In fact, I’d bet that deep down you know you should be following these rules as well but you aren’t – yet. Today is the day you can commit to doing what works for other wealthy traders and get on that same path.
Let’s get started.
1. They plan every single trade. EVERY SINGLE ONE.
Every trader I’ve talked with that makes money consistently knows the following about every single trade they take before they even begin entering a limit order into their trading platform:
The highest price they are willing to pay (if they are going long) or the lowest price at which they are willing to sell (if they are going short)
Their profit target where they will exit if they are “right”
The exact percentage of their account they are risking
Lots of traders do one or two of these things. Few do all of them. In simple terms they know exactly what they want to pay, how much money they anticipate making (or losing) and a very clear idea on the probability of the trade working out.
Although you might think that every great trader uses hard stops that are pre-programmed in, many don’t . However, they are highly disciplined and when their stop loss number comes up they are out. Most traders don’t have that type of hard-core discipline and so a hard stop loss is still their best option.
2. They stopped trying to pick tops and bottoms years ago
Nearly all of the classes, courses and webinars you’ll find on the Internet talk about using support and resistance of some type to find where a market is turning and how to get in before or while it does.
The funny thing is that only a very few successful traders I have ever talked to trade that way. Simply put, 95% of the traders out there that make money are buying higher highs and selling lower lows. They do the exact opposite of nearly everyone out there because they found out long ago that picking tops and bottoms is a sucker’s bet. One trader described it to me by saying that it’s much easier to just participate in what a market is already doing than trying to guess when that behavior will change. Flip-flop your strategy to agree with what the market is doing rather than guessing on when it will change its mind, and you’ll be in a much better position to make money trading.
3. They are patient with winners – and ridiculously impatient with losers.
Dennis Gartman is famous for boiling down great trading to one thing: “Do more of what is working and less of what isn’t.” Sure makes a lot of sense to me.Most traders have a great deal of patience with their losers but get nervous about locking in gains and sell them to quickly – the exact opposite of what wealthy traders do. Wealthy traders realize that they may actually have more losing trades than winning trades so they quickly get out when they are wrong. It is the only way to ensure that they can give their winners the attention they deserve.
They coddle their winners and kick their losers to the curb without a second thought.
4. They trade one market. ONE
I’ve talked with great traders who can trade futures, forex and stocks at the same time. They are a gifted tiny minority.
The vast majority of successful traders concentrate on one market and become so comfortable with it that they begin to “know” the behavior of that market just watching price and volume. Test yourself – if you aren’t able to get rid of all your charts and simply look at price and volume to trade, you’re probably not concentrating enough on one market in order to know its moods. What we’re really talking about here, of course, is not the mood of the market itself but the moods of the market participants!
Focus on trading one market exceptionally well rather than try to trade whatever’s hot – that’s how wealthy traders do it.
5. Their benchmark for success is anything but money
Money changes everything. It sure does. We’re all in this to make money. The trouble is, when traders use the amount of money they make to judge their own success, something happens to them – to all of us, really – that clouds our decision-making ability.
Wealthy traders have realized this and instead focus on other things to determine if they’ve had a successful day. Whether it be how well they were able to execute on their trading plan (see rule #1), or their overall ability to predict short-term movements in whatever they are trading, they know that if they do those things correctly, the money will follow.
Yes of course the money is important. Any trader who says otherwise is a fool. Why else would we put ourselves through this daily ride. But there is something about making it a secondary focus that allows the best traders to make better decisions. The growing trading account simply becomes a nice result – a side benefit if you will – of making good decisions and reading the market well.
Should-Phrases include: “The market should have” and “I should have”. Those phrases are often used to socialize losses. They are a strong signal something is off. They should be used to aid you in correcting your vision not make you feel better.
Must-Phrases include: “The market must…”, “I must make money”, or “I must trade”. The market does not have to do anything and neither do you. When you use the word “must” it is hardly ever from a position of strength. The market knows when you are desperate and will take full advantage of you. Keeping your expenses as low as possible will make it easier to not make those statements.
Won’t – Phrases include: “The market won’t…” or “I won’t make money”. Notice a theme here? You are part of the market, you are not the market. Not getting what you expect, even if it is positive, confuses the brain. If you expect to lose and don’t it is still a bad outcome. Your brain is going through enough as it is. The market is a one way walkie talkie, you listen, it talks.
Can’t – Phrases include: “The market can’t…” or “I can’t…” or “I can’t lose anymore”. Yes, the market can, go look at a chart. Go look at a Fed day or about any chart from 2008. Not only can it happen, it does happen. There are no more once in a lifetime moves in the market. There are and always have been life changing moves. No one ever said trading was easy, but at least in the case of futures someone is taking your money. If you think you can’t, you probably won’t. The market will take every penny you have. If can take every penny you put at risk. Fix the problem, when you run out of money it is too late.
