How to Trade with Your Mind

That's a terrific analogy, "stringing up," since that's exactly how you'll feel once months of phony trading profits are replaced by real money losses.

Perspectives on Trading Psychology

When talking about trading or thinking about getting into trading, it's important to keep in mind that most traders end up losing money.

Most traders reportedly lose because they are not mentally ready to trade or willing to put their money on the line for an outcome over which they have no say. In order to achieve consistent success in trading, one must first recognize that the challenge is primarily psychological rather than technical. Trading can bring about a lot of anxiety, bewilderment, and hopelessness, but you won't have a chance to overcome these feelings unless you learn about trading psychology and the different challenges that bypass strategy. If for no other reason, a string of losses causes traders to doubt their ability to succeed, trading psychology is more important than trading method.

Possible Future Markets

Now imagine that a trader has come up with a strategy for day trading an index future. The system generates 15 transactions every day, and the trader has reached the stage where they can get the following returns while paper trading: The daily average is $375, based on 9 winning transactions with an average of $85 and 6 losing trades with an average of -$65. Three consecutive months of success with paper trading have convinced the trader that they are ready to start trading with real money.

The actual exchange of money begins, but the situation rapidly evolves. In an effort to avoid taking the inevitable 40% loss, a trader may decide to "skip" trades in an effort to increase their odds of success. Then, in an effort to fix the issue, the trader suspects that they are waiting too long to enter their transactions. Consequently, losses increase as traders attempt to initiate trades before the setup is complete by predicting when the trigger will be hit.

The feelings of "what is wrong? Why am I such a sad loser?" take control as the losses pile up. It couldn't be my fault; maybe it wasn't a good strategy to begin with.

Each trade brings new difficulties, new emotions, and more losses, until finally the trader gives up and moves on to other things. Now, the trader realizes that their success in paper trading wasn't sufficient to warrant investing real money. They plan to resume their previous routines of studying and paper trading.

The trader is thinking, "Maybe I should try alternative trading tactics until I can eliminate those losing transactions, and then I will be ready to trade real money again." Perhaps I should just give up trading entirely; perhaps I am a hopeless trader because I am a hopeless person.

How to Trade with Your Mind

Clearly, the trader never implemented the plan they developed while paper trading. The trader's emotional state prevents them from admitting their error, and they instead lay the blame on the approach (believing it doesn't work) and on themselves (for being "such a sad loser"). The trader gives up trading as a result, and if the fundamental causes of their failure aren't understood and rectified, they'll never be able to trade real money again, even if their trading outcomes on paper become 100% winners, which is obviously impossible.

The trader had a plan for their trading approach but not their trading mindset. They were unable to move beyond trading based on fear and emotion and into methodical trading. Specifically, they lacked a strategy for gaining objective access to and understanding of their existing non-method actions and for defining a "setup" for supplanting those actions.

The first step toward developing a successful trading psychology strategy is admitting and accepting the truth: the trader never traded their technique plan.There is nothing wrong with the trading plan, and nonetheless, the trader has not traded it in order to be able to make that judgement. As well, traders cannot internalize trade losses because they lead to their viewpoint of themselves: "You are not a loser because your trade is a loser."

Factors to Consider When Developing a Trading Psychology

Traders should be prepared to take losses as part of the game. Being flawless is not only unattainable but also irrelevant if you want to make money in trading.

Instead of worrying about winning or losing, concentrate on accomplishing your goals. Since the trader had a predetermined target for profitability, they did not accomplish this before moving on to trading with real funds. They didn't realize that sticking to the strategy was the main factor in their success.

Don't pass any kind of judgment on yourself. There is no way to make money trading without doing this first. The constant self-talk in which you call yourself "dumb" or "a miserable loser" after every setback or mistake will prevent you from ever learning to trust your own risk management abilities.

Getting rid of all of your feelings isn't the point, and I don't even think it's feasible. Emotions will inevitably play a role in your trading, but you can choose whether or not to let them.

Recognize that emotions are natural and inevitable; there is no inherent good or evil in feeling an emotion, and in fact, if the trader can change his or her perspective on what the emotion means, it may be quite useful. For example, if confusion causes me to feel sad or hesitant, I want to experience those emotions. Because of this feeling, I know it's best to wait until there's more chart-market clarity before making a trade, which is common during times of market congestion.

Taking things slowly at first could end up being the most crucial part of your overall strategy. Start by trading real money for an hour at a time, and then evaluate your performance by asking yourself, "Did I stick to my strategy, or did I take transactions that weren't in accordance with my method?"

The plan's expectation was attained by averaging 15 transactions per day, so it's understandable that you won't be able to replicate the outcomes you saw in paper trading. As an added bonus, this will help you adjust to the practicalities of real-time, real-money execution and the associated initial emotions, such as the startling realization that the market is moving much quicker than you had anticipated. Doing so will allow you to "build up" to trading your whole strategy at a pace that won't cause you to become so overwhelmed by the process that you immediately ignore what you had intended to do out of fear and emotion.

You have an excellent trading strategy and approach. You have successfully paper traded and are ready to begin trading with real money; however, before you do so, you should make sure that you have a trading psychology plan that is just as good as your trading method plan.