Trading is often referred to as a zero sum game and that other traders are your enemy. That is not the case. You are your own worst enemy. Your fears, your doubts, your anxieties – all of these are amplified in the heat of battle.
When real money is on the line, everything is heightened. Yes, you might’ve been consistently profitable on a demo account for several months. But how come when you go live and the price sails through your mental stop and you’re down a week’s wages, you don’t cut the trade? You freeze up and tell yourself you’ll give yourself another few ticks before selling only you then turn a small loss into a large loss. You suffer from loss aversion.
This is why demo trading doesn’t work. It’s not real. Just like in simulated battlefields with blank rounds, it doesn’t compare. It’s still a safe environment despite the similarities of noise and action. The truth is you don’t know how good a trader you are until you go live.
Mindset of a winner
To succeed in trading and any other competitive sport, you need to understand that winning is a choice. Ask any Olympian who steps up on the world’s greatest stage if they’re hoping to win. They came for one reason only – to take home the Gold – and they believe that they’re going to do so no matter the statistics. Nobody is there to win the Silver.
Trading is not like the Olympics though. Everyone can win if they make that positive conscious choice. But deciding without acting is pointless. It’s no good saying you’re going to be a consistently profitable trader then the next day you punt a position out of boredom with no strategy.
Statistics of traders
The statistics for full time traders are horrible. The often quoted statistic is that 90% of traders will fail within two years, and that within five years 99% will no longer be trading.
To look at some verifiable statistics with some consistent results, most of the retail brokerage accounts in the UK report that 80%+ of traders and investors using their spread betting and CFD platforms lose money.
However, these statistics are still pointless. How many of these clients are people using excessive leverage? How many of these clients have a clearly defined strategy? How many of these clients actually follow their strategy?
It is my belief that once you remove the gamblers and the punters, and instead focus on the traders who turned up to win, those statistics of success improve significantly.
Start by defining your goals
Everyone has a goal or an ambition. It may just be considered a dream and unrealistic, but everyone has them. Whether it’s to quit working and become financially independent, or to give your children a better future through schooling, or to take your partner on a world cruise – these goals are all tangible and they are all achievable.
Becoming specific in what we want will not only give ourselves a goal to aim for but it will help to motivate us when completing mundane tasks or when the market is not bearing much fruit.
There is a trick I learned from neuro-linguistic programming – a very simple one – that yields powerful results.
The next time we find ourselves not wanting to complete our trading journals, or to skip the charts for a day, or even keep our trading areas tidy, we must think about the bigger picture. Think about the end result, not the activity itself. Completing our journal will teach us something new about the day, which is one day closer to our goal. Going over our charts may find us an excellent trading setup, that we otherwise would have missed. Tidying our work desks will mean we have a stress-free and calm feeling. Achieving these all help to progress us towards our goals; acknowledging that small tasks are active steps towards what we really want is a powerful technique to motivate ourselves and keep the bigger picture in sight.
Get specific about your goals
Defining your goals is a great start, but it’s now time to get specific about them. When do you want to become financially independent by? How much do you need to put your children through school? Which cruise would you like to go on and in what year? Once you have these answers, what do you need to do to achieve them?
When we have an idea of what we need to do to achieve them, the overall picture can be broken down into smaller goals and milestones. It also makes the goals real.
Systems for goals
Goals are great, but it’s now time to focus on the process itself. This is ultimately what will drive us there, and our successes and failures depend entirely on the quality of our systems and processes.
The concept of marginal gains is well known about in sports such as Formula 1 and cycling, where tiny improvements are made everywhere in order to cumulatively compound and produce a bigger gain. Even the bedsheets are tested to optimise sleep! Defining our goals and getting specific about them now provides us with the motivation and clarity to show they can be and how they can be achieved. This handbook will help you to create your own process and to trade from a position of strength.
Psychology of a trader
Trading is gambling. Yes, it is gambling with an edge, unlike the FOBTs down your local bookmakers, but it is still gambling.
That means that all of the emotions that gamblers go through – the excitement, the joy, the pain, the near miss, and worst of all – the big win – will go through us too. It’s imperative that not only are we prepared for these emotions but that we can also deal with them.
At some point in your trading career you will make an amount of money that seems so obscene it puts you on a high you have never felt before. Remember, we can only control the downside – our trading risk is to the upside. How we deal with those emotions will determine whether we keep those profits or throw them away chasing bigger highs.
One of the worst things that can happen to any gambler, or a trader, is to experience the ‘big win’ straight away. The brain releases a rush of dopamine, making us dizzy and giddy with excitement. If we haven’t felt the pain of loss time and time again, our brains can trick us into believing that this is ‘normal’ and so we keep taking bigger and bigger risks to make even more money.
Be prepared. If you’re not, the market will take its pound of flesh.
Become a risk manager
Historically, markets have always rewarded the patient. It has also not been kind to those who sell out and capitulate at the bottoms. After the 2008 Financial Crisis, many viewed the stock market as ‘risky’ when the opportunity to buy cheap and ride the new cycle upwards presented itself.
What if there was a way to get out before a crash? Imagine avoiding holding through a bear market, and not inflicting pain on as you repeatedly tell yourself “I should’ve sold at the top” whilst watching your stocks make new lows every day. Nobody can time markets – of course not. But you can manage your risk, and that will keep your exposure down in the market when times are bad.
When entering a stock, you are doing an injustice to yourself and disrespecting your hard-earned cash by not doing your utmost best to protect it. You are sinning against your own family by risking their assets without knowing what is going to happen after you place the trade. You’re not here to make money – you’re here to protect what you have. Once you internalise this and believe this, making money in the stock market won’t be a problem for you. It’s very easy to make it, but much harder to keep it.
Due to the power of compounding, minimising drawdowns is the single biggest thing any trader or investor can do to boost their portfolio long term. We don’t need home runs (though they are nice) but strong and steady gains without wipe-out.
Do you want to be right? Or do you want to make money?
Personally, I’ve found being wrong to be an expensive hobby. There’s no shame in being wrong, but there is shame in staying wrong. Admitting to oneself that we are wrong fast can save us a lot of money. Leaving your ego at the door and tempering your emotions will be a boon to your trading.
We are only trading our opinions in the market – even if that opinion is only “I think stock X will go up because of the golden cross signal on the chart” – and we must realise that opinions are just that. They are neither right or wrong. But the price is always right. P&Ls do not lie.
There is a danger when a trader doesn’t stick to their plan and their P&L goes up. This situation teaches a trader that it’s OK to not follow their plan and rewards bad behaviour. However, this is just the market tempting us to throw away our risk controls, much like the sirens of the sea seducing sailors into smashing into the rocks and drowning.
Trading is a business
Not only is trading a business, but it’s your business. For some reason, trading is the only profession where people believe they can make a lot of money without effort. This is akin to myself deciding one day I’m going to be a plumber, and then taking apart someone’s toilet. All that is doing to happen is I get covered with whatever is inside with no idea how to put it back together again.
Be bold with your goals, but be
realistic too. The best goal is to focus on doing the little things and the
right things every single day, and the results will speak for themselves. If we
only do 30% of what is required to trade successfully, our P&Ls will look
like those of someone who only does 30% of what is required to trade
successfully. Trading is so fun because of that reason, and those who do their
work diligently get their just rewards.
 Getting 1% better each day makes us 3,678% better by the end of the year. Don’t believe me? Type 1 by 1.01 to the power of 365 into your calculator. Little things add up.
 Kahneman, D. & Tversky, A. (1992). “Advances in prospect theory: Cumulative representation of uncertainty”. Journal of Risk and Uncertainty. 5 (4): 297–323.