The Correct Mindset In Trading (Mindset Of A Successful Trader)

The correct mindset in trading is often “the missing link” in order to perform well. To get steady returns you have to focus on the trading mindset just as much as the analysis and strategies. What is the correct mindset in trading?

The correct mindset in trading is one that is dedicated, focused, disciplined, confident, has no ego, has no fear of losing, and has detachment to money. 

For those not into trading, this might sound a little weird. Most traders focus on developing strategies in order to make money. What does psychology have to do with quantitative trading, isn’t psychology overrated in trading?

If you have developed profitable trading edges and trading strategies, it’s time to move on to the next level, which is developing a good mindset for trading. The correct mindset in trading makes you follow your trading edges and strategies!

When you get experience in day trading or other time frames in trading you’ll discover that trading is certainly not as easy as it seems. Quite the opposite. If you can’t follow the rules of the strategies, you simply have no trading strategy. Trading discipline is what most traders need. The correct mindset in trading is what separates good and bad traders!

Below follows some advice we believe most investors should pay attention to:

A trader needs to be dedicated

You should be relentless in developing skills in how to master yourself and your risk tolerance. Some traders love the action, others dream of easy money, but the really good traders think about how to develop trading strategies.

The work should be your goal. Money and action are just a byproduct for keeping score on your performance. The trading mindset should be about how to perform the best. Trading decisions are all about being truthful to yourself.

The success rate is in direct proportion to your talent, skills, work ethics, and truthfulness. Not everyone can become a trader. Mark Minervi was interviewed in Jack Schwager‘s Stock Market Wizards. Here is a quote from that interview (page 176):

“The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions. In other words, take 100 percent responsibility for your results.”

Dedication to your job is thus paramount.

A trader must know himself/herself

This is vital in developing quantified strategies. You have to get an understanding of who you are and your personality traits.

What is the best personality trait for trading? Are you introverted or extroverted? Are you disciplined? Are you able to work on your own? Are you confident by nature? What is your aim? Why do you trade?

Trading is solitary, it attracts people that are introverted. The ones with intuition backed up by gut feel can get some kind of a game going in a few months or a year or two but not for the long term, in our opinion. The ones that back up intuition with thinking take much longer to get a game plan and they can last longer. Emotions can’t be part of any investment strategy.

Many want to “make a lot of money” when they start trading. They want to stay at home and have no commuting. The dream of an easy life seems so appealing. Occasionally go to the cafe and trade from there. They are about to get a nasty surprise when they understand the trading psychology is not as easy as it seemed.

Trading is an intellectual endeavor where most investors fail to make any money. Not only is it difficult to find trading edges and strategies, but you need to execute the strategies. The biggest obstacle is implementing your plans. You have to master yourself and undergo personality change in order to get your trading implemented properly.

A trader stays focused all the time

If you decide to open a pizza shop, most likely you’ll set up some plans for how to proceed. Perhaps making budgets and even some marketing research to check the viability of the plan.

Do you think a potential trader does all this? Probably not. But you need to have a business plan and develop some kind of methodology if you want a trading career. The methodology and techniques have to be linked to your dominant personality trait.

It’s better to have a bad methodology than no methodology at all. This takes time, a lot of time. You first need an idea, some kind of hypothesis, and then you need to backtest the idea to check if it has any statistical edge.

For some, this is the easy part. The tricky part is to execute the trading plan. It all looks so easy when you have the answer in front of you in a backtest.

The problem arises when you are about to pull the trigger. The future result is uncertain. All you know is the past. Self-doubt kicks in.

After a drawdown, you might lose faith in the system and stop trading, perhaps exactly at the wrong time. Therefore, you need to practice and stay focused on what you should do.

Try to avoid thinking in terms of money. The focus should be on execution. We recommend you automate most of your trading.

Trading Discipline

Discipline is for many a negative word. We quote from Wikipedia:

Self-discipline can be defined as the ability to motivate oneself in spite of a negative emotional state. Qualities associated with self-discipline include willpower, hard work, and persistence.

Self-discipline is the product of persistent willpower. Whereas willpower is the strength and ability to carry out a certain task, self-discipline is the ability to use it routinely and even automatically. We can say willpower is like a muscle, where self-discipline is the thoughts that control the muscle.

Again, Mark Minervi gives a very good analogy:

“The first time I seriously watched a poker game in a casino I noticed that the average winning hand was over 50 USD, but that it only cost you 50 cents to see the first three cards. I couldn’t believe that for half a dollar I could get a pretty good idea of my chances of winning a hundred times that amount. If I folded fifty times and won only once, I would still win twice as much as I lost. Those seemed like terrific odds to me. That’s how I got started playing poker. My strategy was to only play super-high-probability hands. Schwager: Didn’t everyone just fold once you played a hand? No, and you know why? Because they were not disciplined, and they wanted to play. The key is to know when to do nothing. Most people, even if they have a winning strategy, will not follow it because they lack discipline.”

Willpower, willingness to work hard, and persistence are not traits that many people have. No wonder this brings negative thoughts to many. However, trading is not a military boot camp, but be honest with yourself to check if you have any of these three traits. If not, trading can be quite hard.

A certain amount of rules are needed to trade well. Even the legendary trader Jesse Livermore used rules to limit himself from doing foolish trades. We advocate systematic trading based on quantified analysis, and this is of course rule-based. The tricky part is to execute the system because you need confidence:

A good trader separates confidence and overconfidence

The key to trading success is emotional discipline.  Making money has nothing to do with intelligence.  To be a successful trader, you have to be able to admit mistakes.  People who are very bright don’t make very many mistakes.  Besides trading, there is probably no other profession where you have to admit when you’re wrong.  In trading, you can’t hide your failures. – Victor Sperandeo

Trading is not different from any other demanding undertaking: It requires mastering the different stages of the learning curve and the quality of this learning process depends on how focused and disciplined the trader is in honoring his acquired skills.

If you’re confident, it’s