Trading is about 25% technical and 75% mental. Your ability to manage your emotions when your money is on the line will be what makes or breaks you as a trader. Like everything else in trading, this is a skill that you must and can learn. Very few people are born with the ability to detach themselves from the outcome of an event. Do not convince yourself that you are one of those people. That is how you build bad habits. Each trade matters, regardless if you win or lose. Learn from each trade and you will quickly dominate the market. Mark down each trade in detail in your trading journal. This will help you spot patterns and focus in on trades that you have the highest hit rate on.
Each trade or investment is a test, game, or battle. Pick whichever metaphor best suits your personality. Within that context you have the freedom to fail or succeed. If you don’t study for your test you won't get good marks. If you don't practice before the big game you won't make the game winning shot. If you go to war with a dull weapon you cannot kill the enemy. Practice and preparation will define your trading journey. If you are able to build good disciplined habits, trading becomes significantly easier as your strategy and rules become embedded in your routine and act like muscle memory. It will become second nature over time, not right away. There is no substitute for practicing and preparing correctly. At the fund I worked at new hires had to prove they could handle a simulation account for three months before going live. This built the foundation of their muscle memory. Most traders will need a similar amount of time before things begin to feel natural.
Many books and subscription sellers tell you that the trick to trading psychology is to trade with a clear mind. They tell you to not day trade if you have a car payment, mortgage, student loan, credit card debt etc. This is not reality. If you had no liabilities you wouldn’t be asking these questions to begin with. Then they mention that, if you have liabilities, you should trade with money that you can afford to lose instead. Money that you are detached from. This a fundamental error and flawed thinking that encourages the fear of missing out and gambling. If you are okay with losing that money then you will lose that money and learn nothing in the process. Yes, trading will be easier if you have less financial pressure. Yes, you shouldn’t day trade with your kid’s college fund. But, regardless of how profitable of a trader you are you will always have those pressures. You will always have red days, weeks, and months. So instead of trading in the same language as those pressures you need to gamify the process and trick your mind into not thinking in dollars and cents.
The game is about percentage return not dollar return. If your average win is 20% and average loss is 5% you will find life changing wealth quickly. You will be able to scale, trade bigger size, and not stress about your position sizing sooner. You are a business. Show proof of concept, and then scale your business. Regardless of your position sizing, 5% on one share is the same return as 5% on one million shares. Do not compare yourself to other traders who brag about their PnL. They are selling you shit and a lifestyle funded by their marketing not their trading! Thinking that I need to make x amount of dollars on this trade will keep you in failed trades longer, prevent you from taking a profit, and build bad habits that will blow up your account. A trader telling me that they made ten thousand dollars on a trade is meaningless. That could be a scalp for 1/10th of 1% or it could be a 300% win. Making money is a secondary result of sound logic, good risk management, and a repeatable process. Think in percentages and you will be able to scale to unlimited sizing. Think in dollars and you will blow up your account.
The unfortunate reality is that you will lose money. You might even blow up your account. This happens to every trader. I blew up my first account when I started trading and felt like the world was going to end. That feeling is terrible. Do not get discouraged if this happens. You are not alone. Use that as motivation, as a learning experience, and let it fuel your hunger to succeed. Reflect on what went wrong, write down those lessons. Write down your plan on how you are going to avoid those mistakes going forward. Review your plan every single day before the market opens. Force yourself to get better. Do not settle for average. When you lost a basketball game as a kid you did not quit. You went to practice, you improved, and you got better. Why should trading be any different?
Do you have a full time job or career that takes away time from the market? Is that stopping you from pursuing your goals and dreams? It shouldn’t. That doesn’t mean you quit your job and become a day trader the next day. That means you build a strategy around your circumstances. There is a lot of value in not having to worry about your bills. People go to night school, or take classes on the weekend. Learning about investing and trading can be the same. Do not create excuses for yourself. You will regret that later. Do not limit your own potential, you have what it takes to become a profitable trader. There is incredible value and freedom in learning the process. That process is different for everyone. Do not trick yourself into thinking that you can take the quick route. There is no escalator to the top. You must work towards your goals and find the self motivation towards achieving this freedom. Here are a few of the common errors rookie traders make. Included are my tips on how to avoid them. For full disclosure I am not perfect and make psychological mistakes myself. I have found success because I am obsessed with learning from those mistakes.
The Fear of Missing Out / Chasing Prices
The most common mistake traders make is they have the fear of missing out because they think a setup is a sure thing and has a monster pay day ahead. There is no such thing as a sure thing in the markets. If something is too good to be true then it isn’t true. A good example of this is the GME mania that became mainstream during the pandemic. Everyone thought it was a sure fire thing and bought it without a plan simply because they didn't want to miss out on the monster gains. People who weren’t familiar with the stock market were placing trades and waiting for their lottery ticket to cash out. The majority of those people lost huge sums of money and then cursed the market for being unfair. We already know that we only trade when we have a setup, confirmation, and then conditions for execution. When we deviate from that we begin to gamble and say goodbye to our hard earned wins. This is unacceptable trading behavior and unsustainable in any market condition.
How can we avoid FOMO?
The simple answer is that there will always be another setup. There will always be another trade. Your objective is to trade as a career and over a sustainable period of time. You should never trade as if you need to retire tomorrow. There is no golden ticket that is guaranteed to make you money. If the trade does not meet the criteria for your strategy do not consider that trade. It also is much easier to avoid FOMO if you trade the same stocks day in and day out. You won’t care what Gamestop is doing if you only trade a basket of securities such as Apple, Amazon, Tesla, and Microsoft. Finally, you avoid FOMO by defining all the parameters of your trade. What you are looking for, what your entry target is. When you define everything you avoid FOMO because FOMO plays never meet your trading requirements.
Chasing price is the ugly sister of FOMO. You have a setup, likely lack confirmation, and then execute. You start to see price move aggressively in your thesis’ favor and your brain tricks you into thinking that this is the move you have been waiting for. You don’t want to miss out on the big gains so you ignore your strategy and enter. Ironically, when you enter on that emotion you remove your edge and reduce and skew your risk reward requirements. Instead, set an entry price target and look to get an entry that is cheaper than that price. That only increases your edge as you improve your risk reward ratio and are patient with your entry. This ensures I trade my plan and don’t deviate from it. If you find yourself still executing trades before the entry target then trade in the simulator until it becomes second nature to you. If you find yourself struggling because it looks like the price is moving without you, switch to a longer time frame while you wait for your entry to trigger. 1 min., 3 min., and 5 min. candles can look extremely dramatic during small price moves. 30 min., hourly, and daily candles help remove that noise.
Deviating from YOUR Trading Blueprint
I have a plan but I ignore it, I have my confirmation but I ignore it, I have my cue for execution but I ignore it. Or, I get bored and don’t wait for my conditions. Even if I know my strategy works and will make me money if I follow it. This is a question of discipline and a lack of muscle memory. Now you must reflect on what causes that lack of discipline. Is this a common theme in your life, is it driven by greed or fear, are you nervous and trigger happy, do you not know any better? Only you know the answers to those questions. The good news is that discipline can be taught and learned. Good habits in your day to day life will lead to good habits in your trading career. Take care of your mind, body, and soul through exercise, healthy eating, and rewards for good behavior. Don’t succumb to instant gratification. The feeling of taking the easy route might feel good in the moment but will feel terrible when it gets in the way of your goals and dreams. I wake up and go to bed at the same time every day, I do calisthenics and go for a run every single day, I seek help from mentors and other professionals when I am lost or confused (by reading this guide you are already doing that). I do not let pride cost me money. I don’t trade in my pajamas, I don’t trade if I am feeling sick or sleep poorly, and I don’t trade simply because I have nothing better to do. Everyone has a different set of routines that is ideal for them. Yet, everyone can always improve and learn something new. Do not overwhelm yourself with building a thousand new habits at once. Add one thing a month and slowly improve. Burnout is real and creates short term progress in exchange for longer term regression.
I won’t lie. It can be extremely challenging to wait for your setups to materialize. Boredom has bankrupted many accounts. Find yourself a project to work on related to trading if you are bored waiting for setups. Join a community of traders that have similar motivations and objectives. They should be just as hungry and motivated as you are. Obsessed with the process and not the result. Trading alone can become incredibly lonely. Together with a strong group you will push each other and learn. I believe people become the average of who they associate themselves with. I code patterns and review previous trades while I wait for my setups. This keeps me occupied and interested with a challenging task while also keeping me in front of the screen waiting for my trades and observing market conditions.
Finally, I recommend building your habits on a trading simulator. If you find the simulator boring. Good. That means you will work on your discipline as you wait for your trades. Nothing should change for you. You mark your trades down in a journal, you trade the size you want to trade when you go live, and you always stick to your plan. Being clutch does not exist, you won't just flip the switch when you go live. Tom Brady doesn’t become better in the fourth quarter when the game is on the line. Tom Brady plays at an exceptionally high level in all four quarters because he practices with extreme precision. People just notice what he does when the game counts. You will never be able to simulate the emotions of having money on the line in a simulator. In the same way you can’t simulate the pressure of a two minute drill in the Superbowl. Instead, you can practice with discipline and build good habits that will take over when emotions kick in. That is what being clutch is. It is performing at the highest level in all conditions. It is not just flipping a switch because there is money on the line.
The Fear of Losing Money and Failure
Losing money sucks. It hurts, stings, and screws with your head. There aren’t many jobs in the world where you can work your ass off and come home worse off than when you left in the morning. In that context trading is brutal. That is not designed to scare you. That is simply a fact in this business. As a trader you are an entrepreneur. There are fundamental rewards and risks with pursuing that kind of lifestyle. You will be able to achieve unlimited freedom with trading. It will change your life. But you must be willing to admit when you are wrong and learn from your winning and losing trades.
Traders fear losing and fear being wrong when they are trading too much money at a time or trading unfamiliar products. If a trade makes you nervous, scale down your position size. If the trade continues to make you nervous, avoid the trade. You don’t need to prove anything to anyone. Think back to our discussion about thinking in percentages. There will always be another winning trade and another losing trade. We don't live and die trade by trade. Trades are only failures if you don’t learn from them. That includes winning trades. Track what works, what fails, and prove that to yourself with data and results.
You will be wrong countless times in your trading career. No trader wins 100% of the time. No trader loses 100% of the time. Trading is not luck. Test your strategy, have confidence in yourself, and do not let yourself stagnate. Do not celebrate winning trades for weeks at a time. Do not let losing trades kill your confidence for weeks at a time. Apply a 24hr rule for any trading day. You can celebrate or mope about a result until you wake up the following day. Practice mindfulness, gratitude, and know when to walk away. Cash is a position too and you do not have trade every day.
A Lack of Self Confidence and No Conviction Towards Accomplishing Your Goals
Everyone wants to have a life of freedom. Not everyone fundamentally believes they can achieve that. Society, our upbringings, and people around us all contribute towards these negative feelings. Let me be very clear with you. You have what it takes to achieve your goals. You are good enough to achieve your goals. You are smart enough to achieve your goals. You must take accountability to achieve your goals. You must believe in yourself before you can achieve your trading goals. Stack up confidence, don’t allow it to turn into arrogance, and find balance in your life. Positive self talk, surrounding yourself with like minded people, and perseverance will help you find financial freedom. This is not an easy path but it isn’t as difficult as you think. Set your goals, write them down, plan how you will achieve them. Visualize success. Do not stop until you get there. Reflect, study, and adapt your progress and reward yourself for hard work. Take care of what is important to you. But stay focused, motivated, hungry, and improve every single day.
Bouncing Back from a Loss
Every Trader Loses
The only difference between a losing trader and a winning trader is that the winning trader never gave up.
No matter how good of a trader you are you are always going to have red days, weeks, or even months. You must accept this reality.
How To Avoid Losing Long Term
It's okay if we deal with some short term variance and deal with some ups and downs. But things shouldn't go down in a straight line forever. The way we ensure we maintain our edge is to make sure we always stay within our risk parameters. So as long as we can avoid losing big we give ourselves an opportunity to trade again tomorrow. And, when we then trade again tomorrow we want to only focus on our A+ setups.
If we can trade only the strongest plays, with basic risk management, we always put ourselves into a situation where can bounce back. Where we can take advantage of our 75% edge. But once we give away that control and start to trade with our emotions, we ensure that we continue as losing traders in the long term.
How to Win Long Term
The only way to become a winning trader is to turn green days into green weeks, and to turn green weeks into green months and years.
Now I am sure that sounds really basic but within that context it always our choice on how we want to trade. If you are already up a decent amount on the day, you gain more value locking in that profit than trying to trade that next setup.
If you closed every trade the moment it turned green you would be a lot more profitable than you are now. So lock in and protect green days. Turn those into strong weeks, and then those weeks into strong years. The sooner you can start compounding green days, the sooner you will see consistent account growth. So your objective isn't to win big, it is simply to finish the day green so that you have the best chance to finish green again tomorrow.
Watch out for Greed's Pull
When you've had a big winning day our greed tries to get us to trade more. It wants us to the do easy thing and give away all our money. Force yourself to not over-trade after a winning play. Lock in those profits, size down, and only trade A+ setups. What feels best for your account in the moment is rarely what is best for your account long term.
Being a profitable trader is a choice, and if you consistently choose to give away your green days, you do not stand a chance of becoming a profitable trader.