The mindset of a profitable trader
As a trader, becoming overwhelmed and lost within the market is easy. A good way to avoid unnecessary stress is to have a clear plan of action with any trade you make along with a target goal and a designated stopping point. Still, even with a concrete plan traders still get disoriented balancing all their trade ideas and find themselves trailing stocks and pulling out of a trade at a suboptimal time. As traders we must ask ourselves what we can do to avoid these issues as much as possible and how we can keep our minds strong and focused throughout the process.
I believe the crucial steps necessary to become a profitable trader are to understand your emotions and not let your feelings influence your decision making, and to work on hardening your mental psyche with a growth mindset and effective goal setting.
Overthinking your PnL
As traders we would assume that most of our mental energy should be focused on the money we put into trades and our profits and losses (PnL). Now, this is not an unreasonable assumption as traders’ daily lives revolve around the movement of the market, and I understand that at the end of the day we all want to earn big rewards on our trades. However, while worrying about the monetary aspects of an investment and if you’re earning or losing money is essential, we as traders should try our best not to concentrate on these details.
Over analyzing and dwelling on the finances involved with trading can cause a trader to become devastated when he takes a loss — and overjoyed with a win — in the market. Of course it is natural to feel happy when a trade goes our way and upset when one does not; however, when we solely focus on the money involved with trading we get caught up in the superficiality of our jobs and forget to focus on ourselves as well.
Additionally, we can allow a big win or loss in a trading day to have an impact on our game plan, which is something traders want to avoid at all costs. All traders need a cohesive plan with any trade they get into, and exclusively thinking about the money is not the path to success. Instead, I believe we as traders must learn to understand our emotions and mental psyches because it helps us to stay mentally sound in the competitive game of trading and gain more confidence in ourselves and the decisions we make.
How a financial loss can affect a trader
I imagine some of you may be thinking to yourselves at this moment, how are we supposed to not worry about our money, if what we do is exchange money on the financial market on a daily basis? I understand this concern as it is normal for us as working individuals to worry about where our money is coming from. However, excessive stressing over these financial details will cause you to get lost in the market and potentially lose a great deal of confidence in yourself as well. To illustrate this idea let’s imagine a trade you made one day went south and you end up losing a large percentage of your monthly earnings in an instant.
If all you are worrying about is the money that just vanished from your fingertips, you would immediately begin to agonize about your monthly expenses and how you are going to manage to get by for the rest of the year. You may even begin to feel that trading is not for you and start thinking of a career change. This in turn will not only damage your mental health in the moment, but also greatly impact your decisions in the future, as you will constantly be thinking about your mistake and the money you can’t get back. Nevertheless, you hop back on the saddle and continue trading for the day, but you find yourself not being able to focus enough mental energy towards the next trade because you have all this psychological and emotional baggage from your big loss.
You may even start making more volatile trades to quickly recover from your loss, causing you to potentially lose even more money in the process. This is a problem I would like all traders to avoid, and I believe it can be done by focusing on your emotions, mental health, psyche when trading as opposed to solely just your finances. By focusing on ourselves as individuals we as traders can learn to always be thinking about the next trade and not let life’s problems cloud our decisions on the financial market helping us to be the best traders we can be.
Leave your emotions outside of the market
- What emotions come with trading?
- How can we as traders get in touch with our emotions?
- Techniques and tools to take our emotions out of the market?
First, let us now dive into what it means to understand your emotions as a trader. As traders, for us to become more in touch with our emotions, we must begin by acknowledging what aspects of our lives drive our emotions. Our environments and the stresses in our lives are huge influencers of the way we feel and can cause us to trade or play the market sub-optimally if we allow our emotions to control us. In trading letting your emotions get the best of you is referred to trading on tilt, and trading on tilt often leads to heavy losses.
In life, your environment, and more specifically a change in your environment, can greatly impact your emotions and add extra burdens to your life. For example, if you just had a child or recently moved into a more expensive place you would likely be worried about extra bills and payments you previously did not have to stress over. As traders we must recognize that these added burdens we put ourselves under can easily influence our decision-making as traders.
We may feel pressured to produce a higher income to live more lavishly or even just to supply the new demands that come with having a baby. The added stress of these concerns could cause you to make risky trade decisions, and when they go under you could be left in an even worse position than when you started the day. The question then naturally arises how we can avoid this downward spiral of anxiety and still make smart, effective trade decisions.
The first step in doing this is separating the market from your life. The stock market is purely a medium of exchange where publicly listed companies float shares and provide investment and trade opportunities for buyers and sellers of stock. It has no room or care in the world for any individuals’ emotions or personal struggles in life. This is how the market holds its integrity and fairness, giving everyone an equal opportunity to succeed and rewarding those that work the hardest and understand the market best. So, if the market does not care about any of your personal problems you should not bring them into it.
Dragging your emotional baggage into trading will only cloud your decision-making and cause you to sway from your original plan for a particular trade. We as traders want to avoid veering off our set paths because it results in a great deal of uncertainty and risk. Keeping your emotions out of your business is easier said than done, but creating this separation will let you as a trader to not allow your personal issues or feelings to step into the decision and planning process of trading.
An amazing technique to learn to master this partition is to take a mental break throughout the day and step away from the screen for an hour or two. By giving yourself time to reflect on the trade choices you made in the morning you not only give your mind the rest it needs but you also make time in your day to reflect and look back on the decisions you made. In turn, you are better able to assess your triumphs and mistakes from trading and can analyze how you managed to be successful in a particular trade.
Additionally, you can look back on your mistakes and figure out how to avoid these in the future. A mental break also helps you stay focused in the moment when trading because your mind is aware that you will have time to look back on your previous trade decisions in the future. Furthermore, you can use this break to create a plan on how to improve your trading choices for the afternoon.
With any job, if you are constantly working and worrying about a task it can easily consume your thoughts and cause you to underperform in whatever you may be doing. Therefore, I believe a small mental break throughout the day is crucial for the success of any trader, and it is important for all traders to begin this practice
As traders, we place financial bets on a daily basis, and it is easy for us to get caught up in the monetary outcomes of the trades we make. However, overemphasizing the money involved in trading causes us to get caught up in our trade wins and losses. This can lead to us letting our emotions sway our decisions as traders and cause us to perform at suboptimal levels.
A loss can cloud your judgement and cause you to risk more in a volatile market, and you can end up losing even more money in the process. Therefore it is essential for us as traders to leave our emotions outside of the market and our trading decisions. A useful technique to help create this separation is setting aside time in your day to reflect on your trades for the day and allow yourself to get more in touch with your emotions.
This strategy will help improve your approach as a trader and make you more profitable as well.